Good morning, ladies and gentlemen. Welcome to Petrobras Webcast and Conference Call with Analysts and Investors concerning its 2019 Third Quarter Results. We would like to inform you that participants will follow the transmission by Internet and telephone only as listeners. After an introduction, a Q&A session will begin.
At which time, instructions on how to participate will be provided. [Operator Instructions] We will start by listening to the Petrobras CFO, Andrea Almeida, with the main highlights results. Then [indiscernible] questions will be answered.
Please note, that the presentation will remain available throughout the webcast and at the company’s Investor Relations website. Attending today, we have Mrs. Andrea Almeida, Chief Financial and Investor Relations Executive Officer; Mrs. Anelise Lara, Chief Refining and Natural Gas Executive Officer; Mr.
Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Executive Officer; Mr. Rudimar Lorenzatto, Chief Technology and Production Development Executive Officer; Mr. Eberaldo de Almeida, Chief Corporate Affairs Executive Officer; Mr. Marcelo Zenkner, Chief Governance and Compliance Executive Officer; and other company’s executive officers.
Mrs. Andrea, you may proceed, please. Ladies and gentlemen, please hold. Ladies and gentlemen, please hold. Ladies and gentlemen, please hold. Ladies and gentlemen, please hold. Ladies and gentlemen, please hold. Ladies and gentlemen, once again, please hold. Speakers, you may now proceed..
Good morning and afternoon to everyone in the line. We are very happy to present Petrobras Third Quarter Results. We had excellent economic and financial performance in the third quarter.
The results reflect our efforts to transform Petrobras into an increasing resilient competitive company, capable of adapting to the most dynamic market in which we operate. And recognizing the challenge of this market and its risks, this lets us to focus on cost optimization, increase operational efficiency and definitely reducing our indebtedness.
The strong growth in oil and gas production this quarter at lower cost exemplifies the resilience we are aiming for. In the third quarter of 2019, production reached a new monthly record of 3 million barrels equivalent a day, in addition to our new daily record of 3.1 million barrels equivalent a day, both reached in August.
Although, Brent’s price declined quarter-on-quarter, our EBITDA in the E&P segment increased 2% to R$32.1 billion. This was due to the ramp-up of new platforms, especially in the assets in which we are the natural owners, the pre-salt, where we have achieved excellent results.
The pre-salt represented 60.4% of oil production in Brazil, and the FPSO P-76 in the Buzios field, reached its ramp-up in record time of 7.7 months. In addition, our lifting cost reached its lowest pre-salt level of about US$5 per barrel equivalent in the quarter, which were helped to reduce the average lifting cost in Brazil to US$9.7 per barrel.
These operating advances were reflected in the record operating cash flow of R$32.8 billion in the third quarter of 2019.
I also supported by the successful transaction for the anticipation of receivables from Eletrobras, whereby we received R$8.4 billion for a debt maturing until 2025, and which together with the sale of BR Distribuidora shares resulted in a record free cash flow of R$25.7 billion.
We’re building the new Petrobras, a sustainable competitive company that operates safely and ethically creating more value for its shareholders and society. In this sense, we approved the new strategic positioning for Petrobras.
The new vision is to be the best energy company in the generation of shareholder value, focusing on oil and gas with safety, respect for people and the environment. In October, we held the Petrobras Congress of SMS 2019. The event then mobilized all areas of Petrobras as well as participants such as Total, Shell, Equinor and others.
On October 3, the 66th Anniversary of Petrobras and the last day of the Congress, we launched the fourth cycle of the commitment to live program. This is the first cycle of this program.
We have been able to reduce our recordable injury rates from 2.15 to 2.75 in the third quarter of 2019, our lowest quarterly rate still below the benchmark history of our peer group, which is 0.8% – 0.8, sorry.
We will continue to deliver value in oil and gas production with the progress of divestments in onshore and shallow water assets, which are definitely not core assets for the company and for which recent transactions showed that there is a strong interest from companies able to add more value.
At the same time, we continue to recompose our portfolio exploratory approach, focusing on deep water and ultra-deep water assets with significant investment, as we did in the 16th ANP Bidding Round, and how we expect to do in the Transfer of Rights schedule for November 6.
In the refining segment, we also had good operating results with higher production following the quarterly increase in demand. We’re also adding value to our mix by increasing the 0.5% Bunker output in line with the IMO 2020 specifications, which needs the competitive advantage we naturally have.
We have abundant of low sulphur oil production, which will benefit economically from the limitations imposed by the regulation. Continuing refinery, we are making progress in the refinery sale process, in accordance with our divestment system and in line with the agreement signed with the antitrust authorities.
We launched the second package for the sale of 4 refineries. And one of them, REGAP has even progressed to the non-binding phase. We hope the others will migrate to this phase in the coming weeks. We signed 2 important agreements in the third quarter.
The first in July with the antitrust body in Brazil, Cade, to promote competition in the natural gas sector in Brazil; and the second, in September, with the Government of Uruguay, to exit natural gas distribution segments in the country.
In the third quarter of 2019, we had a quarterly reduction of 9% in general and administrative expenses, and we launched the third 2019, voluntary termination program, exclusive to the corporate segment.
In terms of changing the structure, we created Digital Transformation and Innovation department to consolidate our information technology efforts and the company’s transformation change process, providing more agility, productivity gains and cost reduction.
Another highlight of the third quarter was that Moody’s increased our stand-alone credit rating by one level from Ba3 to Ba2, and kept our corporate debt risk level at Ba2 with a stable outlook. With this review our stand-alone rating equals our global scale rating, which follows Brazil rating.
All liability management movements carried out in the recent years have contributed to a better perception of our risk. From the beginning of 2017 until October 2019, there was a 316 basis points decrease in Petrobras credit to full swap indexed for the 5-year period.
Improving these ratios enables lower interest payments on future fund raising allowing for better management of our cash flow and further strengthening capital discipline. Regarding our capital structure, we made excellent progress in our deleveraging.
Our debt reached US$9 billion in the third quarter with a reduction of US$11 billion quarter-on-quarter. We were able to reduce the cost of debt to below 6%, reaching 5.9% on September 30, 2019. And at the same time, we extended the debt term to 10.4 years from 10.25 years.
This result was possible due to our efficient financial management and our focus on reducing Petrobras debt and achieving the 1.5 net-debt-to-EBITDA target by 2020. We have made several financial operations that will contribute to reducing the cost of debt, including the R$3 billion debentures issuance.
That was the largest market distributed infrastructure debentures in the history.
We will continue to work hard on our transformational agenda, seeking cost reductions, increasing the efficiencies of our operations and investments, in line with our vision to be the best shareholder value energy company focused on oil and gas, and safety, respect for people and the environment. I think we can now move to the questions..
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Régis Cardoso, Credit Suisse..
Hi, everyone. Good morning. Thanks for taking the question, Andrea, Capo, Anelise, Rudimar, everyone. So two topics I wanted to discuss, first one, probably to Anelise on downstream. I wanted to know whether you guys have quantified the impact of IMO 2020.
Could it either be in terms of crack spreads or any million dollars impact in the quarter? And still in downstream, there are ongoing 30 – regarding verticalization in the downstream segment regarding the field of refineries.
So I just wanted to know whether the actual sale of the refineries’ contingent on, final say regarding whether distribution companies or integrated IOCs can actually have production, refining and distribution. And then, lastly, if I may, just a second question in terms of the new position as Board of Executives, on digitalization and innovation.
I wanted to know whether you have mapped so far cost savings initiatives and how could you implement these new digital initiatives to actually reduce cost? Thank you..
I have to apologize. I believe, Régis, you will have to repeat the question, because there was a problem in the line, we couldn’t hear you. So would you mind just repeating for us? Sorry about that..
Absolutely, no problem. So, two topics, one downstream, the other on digital innovation. On downstream, if you have quantified the impact of IMO 2020, either in terms of crack spreads or a fuel – oil bunker or in terms of million dollars in the quarter.
Still in downstream, whether the sale of the refineries are contingent on a final say regarding vertical integration, either downstream to distribution companies or upstream to companies that also have production of oil. So if the actual sale of the refinery depends on a final say on whether vertical integration will be allowed.
And then, on the digital initiatives, whether you have mapped opportunities to reduce cost and if you have examples of how these innovation and digital initiatives could be used in that sense. Thank you..
Good morning, Régis. Related to your question about the impact of bunker 2020, what we’ve seen today is an increase in the crack spread of [diesel already] [ph]. We are approaching $18 per barrel. And we expect next year to achieve $22 per barrel, due to these – to the impact of the bunker 2020, okay..
So I believe you asked as well about refineries. So it was a snapshot on that. The decision, when we decided to sell the refineries, we took the portfolio view of the refineries. And we consider the operational efficiency of the – how the refinery is integrated to the E&P systems as well, and how the refineries were integrated themselves.
So this decision on which ones would be sold, it’s already taken, so it doesn’t – it’s not going to be impacting. So there is no final discussion around that. And that’s how we decided which ones would be sold. I don’t know it was the question, but I wanted to mention that before the digital transformation.
So on the digital transformation, all areas had the chance. We did a war room and all areas had the chance to define what are the most important projects that we have to develop, to – definitely to reduce cost or to improve efficiencies in the overall company. Maybe I’ll give one example from the refineries.
We do have in some refineries already what we call the digital twins, where we use a digital refinery to simulate the best feeds that we have to get into the refinery with the products that we wanted to produce or the products that are better demand by the market.
And this simulation was done once a month before, if we don’t have that technology in place. With the technology, we can run the simulation, the optimization of the feed and the refinery system every day. So this is one of the examples that we would be implementing.
And in an E&P, I would say, we would be focused as well on projects to allow us to shorten the time between the discoveries and the first oil into the market. So definitely this might be the best focus for the E&P digital transformation..
Thanks very much, Andrea.
If I may, just a follow up regarding the topic on the vertical integration, I understand very clearly on Petrobras perspective, but I wanted to, if you also have a view on whether the potential buyer for those assets could be someone vertically integrated, because I remember at the time the CNPE put out the guidelines for the breaking Petrobras’ quasi monopoly in refineries.
One of the topics that raised attention to was that demanded studies regarding vertical integration of the potential buyers..
Ladies and gentlemen, please hold. Ladies and gentlemen, please hold. Speakers, you may proceed..
Régis, concerning these verticalization issue, for the buyers, we understand that it’s not – it won’t be unusual. Since Petrobras will be integrated company in the southeast of Brazil, right. We are going to have upstream and downstream in the southeast of Brazil. And we see that this behavior can also be used for other buyers.
Concerning distribution companies, it was – there was restriction for BR to participate in the refineries divestment process. But it does not mean that other distribution companies cannot buy our refineries. It’s clear that it was only to avoid Petrobras – to increase Petrobras shares in the other regions also.
So for the downstream divestment, I think this unbundling or the verticalization issue won’t be a problem for the potential buyers..
Very clear, Anelise. Thank you very much..
The next question comes from Christian Audi, Santander..
Thank you. Hello, Andrea and team. Congratulations on the results and on the continually improving disclosure, because it’s very helpful for us. Andrea, my first question was on the cost front. You’ve been able to improve lifting cost for example for pre-salt among others.
So I was wondering, if you could share with us your outlook of where do you see more opportunities for costs to go down.
Could we expect further lifting costs reduction? What’s the outlook for refining costs? And then any other specific administrative costs that you see, potential upside for them to be further reduced? The second question was on the production front. After a difficult June, production has really turned around.
And with this improvement, I was just wondering if you could talk in general terms or talk about how your conviction for this continued production growth is going to next year.
Do you feel that you’ve really overcome the issues that you had, had in Buzios and how you foresee the outlook for next year?.
Thank you, Christian, for your questions. So starting with the costs, we do have some goals more focus on 2020. So we will have goals for 2020, and there will be goals for all areas on cost reduction.
So let’s say what we have been doing in the voluntary dismissal programs will continue, because this is the – somehow, this is how we can reduce the personnel costs in Petrobras, so we will use those kind of initiatives to reduce costs everywhere.
We will have for the operations and so forth, the refineries and from the E&P goals as well to reduce costs in 2020, and definitely there will be attached to the strategy of that area. So there will be certain indicators will be looking for, but we’ll give this guidance to you in December.
But definitely, we’ll see 2020 more focused goals and not 2023, so something that we will need to implement faster. And now I transfer the words to Carlos Alberto. I don’t know, if I answered your question..
Yeah, Andrea. Just as a quick follow-up.
Do you see – where do you see the biggest opportunity on the cost reduction front going into next year? Is it upstream? Is it downstream? Are you able to give us a sense of where you see the biggest upside in terms of reducing costs?.
[Technical Difficulty] areas and considering that all the operations are going to reduce somehow, we have sales of assets in refineries. We have sales of assets in the shallow waters and onshore. So definitely, the corporate areas that support those business, they have to reduce as well.
So those areas will be – may be more focused on head costs and taking a look at the service costs that we have as well. So I think there will be opportunities everywhere. So we will have very good ways on improving this company moving forward. I will pass the words to Capo..
Hello, good morning, Christian. Regarding the production, and we are very close to our business plan. And at the end of the year, we are going to have this growth for the 2020. I think that in terms of the guidance for next year, we should think about 3, we have now higher production, for sure.
But at the same time, we will have – we will enter into a decline phase of some systems that we have, which is natural – a natural decline of production.
And we have to consider that – at the same time that we have more platforms and systems, we’ll have more production that will be – less production that comes from the stoppage of those systems as well.
And also, we have to consider that we would be drilling more inspections for the risers, the subsea risers that we have and when we want to control better the problem that we have been facing on the corrosion by the CO2.
So that also some guidelines, we do not – we should not forget as well that we are going to close an important transaction related to the Tartaruga Verde field, and where we are selling 50% of our share on the field that which means something like 60,000 barrels per day and also the participation that we have on the assets of Nigeria, which means something like 35,000 barrels per day.
So we have to put it altogether in the mix and to take what should be the real production for the year 2020. We are really on a good perspective, but we have sum it all and see what’s going to be the production that we have until – on the 2020.
So that’s – we also have some units that will go on stream, the P-68 at the end of this year, the P-70 next year, also, some wells that are come on stream, and we’ll fill those platforms.
So it is a lot of facts that we have to take into consideration, but the perspective is good, but so far, I can’t anticipate a number that we are going to – for the 2020. And I think that – but in 2 months from now, and at least 1 month and something more, we will have this goal for the target that we are going to present to you for the year 2020.
It’s a lot of facts, but good facts, but at the same time we have to think about what is – what are the negative effects that we’re always facing as we have to manage it..
No, very helpful, Capo. And do you feel that you have overcome and really understand the issues that impacted you back in June? So they are behind us.
The learning curve is behind us, and therefore, you’re more comfortable with the Buzios dynamic with these more complex platforms from a natural gas production point of view dynamic?.
Christian, Rudimar here. I’d like to say that, of course, we had some problems in Buzios mainly in the commissioning of the gas plants of these platforms. I have to say that we got very good solutions, but it was partial. And we are still studying how to improve this uptime of these platforms.
We’ll have a lot of specialties working hard for getting better results considering the operational efficiency of this platform, and is according with our target production..
Great. Thank you. And just one last follow-up on the topic of CapEx. You’ve done a very good job in your CapEx discipline, lowering your target and stick into it in terms of the yearly CapEx between US$10 billion and $11 billion. But pre-salt production, as you’ve highlighted is interesting.
Does that mean that, we could see a potential increase in CapEx purely due to this higher expenditure to pre-salt production? Or you feel comfortable that US$10 billion to US$11 billion per year is a sustainable level for the company?.
We will be doing that work, definitely, we are doing right now to give you the new 5-year sense of CapEx. But we don’t expect any huge increase in CapEx that’s what I can tell you. So you might expect something similar coming for the next 5 years..
The next question comes from Frank McGann, Bank of America..
Okay. Thank you very much. Just 2 questions, if I may. One, just in terms of your lifting costs and specifically special participation taxes, it seems as if with Buzios production rising, the specialization tax should decline.
And I was just wondering, how much you have seen already in terms of the average decline we’ve seen over the last year that could be attributed to that and how much additional upside or downside, depending on how you’re looking at it? You could expect to see, because that’s should be, I think, a fairly important driver of cash flows as we go forward.
And then secondly, just if you could comment on the status of the labor negotiations..
Hello, Frank, about the lifting costs, for sure, we’re having a very good performance on the pre-salt assets, and particularly on the Buzios field. I think, the Buzios field today, we could think about, I feel like, US$4 per barrel based on the fact that we have our own platforms there. We do not share the FPSOs.
And we are now with our production reaching the top of some platforms. So the figure is – I think to use or to consider US$4 per barrel as a figure for the Buzios field could be a very good number on the estimates for the field, could be less as well. It depends on the performance that we are going to be facing on the next quarters..
Okay [indiscernible] would be lifting costs, you mean?.
Yes. Lifting costs for Buzios..
Okay. And in terms of just the special participation tax, I don’t know, at least at some point, I mean, we should begin to see a very substantial reduction or no paying off, at least, special participation tax in Buzios and the other Transfer of Rights field. Just wondering, how much impact that could going forward..
I will like to understand you, Frank. We don’t have a special participation on the Buzios field, because that’s a Transfer of Rights region. And I don’t know, if I got your question..
No. I – we’ve seen a sharp reduction – there is some reduction in the level of taxes over the last 12 months, which part of it verifies it, of course, but I would assume also part of it is just no special participation tax on some of this new production.
So I was wondering, as we go forward, how much additional benefit you could – we could see potentially in the special participation tax line..
Well, on the following quarters, we will – as we don’t have the special participation. We just have special participation on the Lula field. We can also increase the special participation for those fields with the entry of the P-68, for instance, we expect it to grow, but you all depend on the profile that we’re going to face for the price of the oil.
And particularly in this quarter, we have this phenomenon associated with the fact that we were considering to pay the special participation for Lula, and also Cernambi. And by a decision from the – our supreme judges to Lula….
Supreme Court..
Supreme Court. It was a decision from it. And based on this decision, we are not now paying the special participation for those fields. And it is the fact that – make that we have this reduction in this – on the government participation.
But it was event isolated for this quarter, and we expect that it will continue, and as particularly with we win this battle. And for the years to come or for the quarters to come, there will be an increase in the special participation due to the fact that I mentioned regarding the platforms that are produced from Lula field..
Okay. Thank you very much..
About the labor negotiations, we concluded the negotiations last week. So we didn’t succeed in having a convergence with the unions. We have here in Petrobras 17 unions representing the employees of Petrobras.
So right now, we are discussing the labor justice here in Brasilia, in order to avoid the strikes that were announced to start to commence tomorrow. But anyway, we are very well prepared to avoid the impacts on production and on sites as well.
So now we are running – discussing this – all this, the storms with the labor justice in Brasilia, right now..
Okay. Great. Thank you very much..
Then next question comes from Pedro Soares with BTG Pactual..
Hi, everyone. Thanks very much. I just have one quick question to Andrea. Andrea, regarding the US$9 billion amount to be received by the government related to the Transfer of Rights agreement, the company has been stating that it shall use that amount in the surplus auction itself since the rates of returns are worth it and so on.
But given the very strong results that the pre-salt has delivered so far and also with the very promising outlook deriving from those fields, would it make sense to perhaps be even more aggressive? In other words, it would be interesting to have a sense from you guys whether is there any possibility to disburse from more than the amount owed by the government in the surplus auction? Or is Petrobras really limit a bit to that US$9 billion amount?.
Thanks for the question, Pedro. We know how good those fields are, and we will be balancing our objectives on the leverage with the quality of the fields that we’ll be bidding to decide how much we are going to use on the auction. But we cannot anticipate to you, but we know, it’s very good.
So we definitely agree with you that we have good fields there, but that will be a balance between our overall strategy that is to focus on the assets that have higher return with the leverage, so that will be a combination. Thank you for the question..
Yeah. Sure. Makes sense. Just a very quick second question, if I may, maybe to Capo.
Capo, concerning the production in the next quarter and considering the ramp-up of the pre-salt platforms and also the starting P-68 operations, is there any possibility of a no-growth scenario in the Q4? Like, any kind of stoppage or technical issues that might pose some kind of threat for growth or not, because it seems to us that that’s mainly given at this point.
Thanks, guys..
Well, as I have already mentioned, one thing important to consider is that, the same time we are – that we are now in the process of having this growth forward, keeping the production on the Buzios field, which is approaching its stop with new wells entering, new platforms into.
But at the same time you have consider that we will face a closing – the closing of the Tartaruga Verde field and also the selling of the assets that we have on Nigeria. And this amount is something like 100,000 barrels per day.
So it will depend on what we – when it will happen, the closing, and at the same time, the capability that we will have in the next quarter in order to keep this good performance on the Buzios field..
Okay. It’s very clear. Thank you very much..
The next question comes from [Mathios Enfeld, Banco UBS. Mr. Mathios Enfeld] [ph], you may proceed. The next question comes from Pedro Medeiros, Citibank..
Hi, guys. Thanks so much for taking this follow-up questions, okay. I have two additional questions. First one is just to get an update on Petrobras interest and whether there was any progress for crafting a potential partnership for the Marlim field. And this has been an ongoing process for a while.
I think the last guidance was to potentially see some evolution in the third quarter. So if you have any incremental color on this, I would appreciate.
The second question is, in your last meeting, company has mentioned it was considering to look for alternatives for reducing its pension fund deficit or it’s – the annual deduction and contribution to the pension fund from result.
So just wanted to understand whether there was any evolution about our plan targeting that deficit and whether any of the alternatives could potentially involve commitments that would impact the trajectory to reach the gross debt target, okay, meaning there will be any kind of contribution that would impact the trajectory. Okay, thank you..
Pedro, regarding the Marlim field, with then the possible partnership with CNPC, we don’t have anything to add right now. We are still with them evaluating, because it’s part of the strategic evaluation that we are making with the CNPC regarding not only the Marlim field, but also the Comperj asset.
So we cannot anticipate what – how we are going to close, or at the end of this how it’s going to end and then the effect..
Pedro, thanks for your question. So regarding [PetroSA] [ph], we do have, not some news, but something that we have been working on that still have to be discussed and approved. But we might have a better solution to solve the deficit of the plan right now.
And the solution might be to – not just to increase the contributions of everybody that was the – that was a solution we used in 2015, but to balance the increase of the contributions with the decrease of the benefits in the future, and to increase the term that people would be able to pay those contributions.
So I don’t expect any negative impacts for Petrobras. Petrobras has to contribute 50% of that always. But I do expect some faster process to solve this problem..
Okay, very good. Thank you..
The next question comes from Bruno Amorim, Goldman Sachs..
I have a quick follow-up question on the transfer of rights surplus auction.
At this point, are you discussing with potential bidders, the amounts and mechanism for the compensation that you have to give to Petrobras for the deferral of the production curve and also the CapEx you have made in that area? Or will that be discussed only post the auction? Thank you so much..
Hello, Bruno. It is Capo. And right now, I can’t anticipate to you what we are doing, because it is – in fact, it’s part of our process of participation on the bid. I’m sorry about that..
Understood. Thank you..
Thank you, all. At this time, the Q&A session of Petrobras webcast and conference call is over. Mrs. Andrea Almeida will make now her final remarks. Please, ma’am..
Thank you very much, everybody, for joining today. We will be focusing on our strategy very well, discussed with you over the last months. So you should not expect any difference moving forward.
So increasing transparency, deleverage, continue the divestments and looking for all ways we can improve the efficiency of this company is going to be our biggest focus moving forward. Thank you very much..
Thank you. Ladies and gentlemen, the audio 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..