Petróleo Brasileiro S.A. - Petrobras (PETR4) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Petrobras webcast with analysts and investors concerning the measures that are being adopted by the company due to the impacts of COVID-19 virus outbreak and the oil price shock. We'd like to inform you that all participants will follow the transmission by Internet as listeners. After introduction a Q&A session will begin. You can send questions for us by email [email protected]. With us today, we have Roberto Castello Branco, Petrobras' CEO; Andrea Almeida, Chief Financial and Investor Relations Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Anelise Lara, Chief Refining and Natural Gas Officer; Rudimar Lorenzatto, Chief Production Development Officer. And also, we have other executives with us. We'll start by listening to Petrobras CEO, Roberto Castello Branco. Please, Roberto, go ahead.

Thank you, Carla. As always, it's a pleasure to talk to you to exchange some ideas and clarify some points about the company, the actions that we are implementing about our view of the global scenario. In my professional life, I have lived through several crisis from the Latin American debt crisis in the 80s to the global financial shock of 2008, price collapse of commodities, including oil, and now with this situation created by COVID-19. Of course, my perception is that we are living through unprecedented times. This is more serious than we had in the past. It's perhaps the worst crisis suffered by the oil industry over the last 100 years. There is no formula to deal with crisis, but there are some key points that experience tells us to observe. First, stay calm, don't panic. Second, transparency, communication. Very clear communication is very, very important. Third, teamwork, more than ever, teamwork is very important. Fourth, move fast because events move fast. Sometimes, there is a sudden stop of certain activities. Volatility is high. And last but not least, in times of uncertainty where we don't have a probability distribution in mind, you have to be prepared for the worst scenario. We are facing not only a price collapse. Price came to $25, around $25 per barrel from $65 some -- recently -- some weeks ago. Our market cap collapsed to the low 30s from USD 100 billion. At the same time, we have a demand contraction. In Brazil, demand for fuels is reducing significantly. And in the world, we have seen some signals of recovery in China, that's very important, given that China is the destination of most of our oil exports. But on the order side of the world, the U.S. economy is entering into a sharp recession. The jobless claims amounted to 3.2 million workers. There was a -- there is a jump from 287,000 job claims last month. We took some measures to preserve our liquidity. We have 2 priorities. First, to preserve the health of our employees. And in addition to that, we are taking some initiatives to help others. And second priority is to preserve the liquidity of the company. At this time, it's a fundamental issue. We have been meeting, working over the last 7 to 10 days with teams fully dedicated to present a response to the current situation. And we announced several measures that enhance our liquidity and prepare ourselves. We start to prepare ourselves to live with a price of oil as low as $25 per barrel. In the past, we are preparing the company to live under a lower price, under a price of $40 per barrel. Now it has changed. We, despite -- if there is some unexpected event, unless there is some unexpected event, we are not predicting a recovery, a significant recovery in the price of oil. We have to prepare for the worst-case scenario, as I said. But despite the severity of the recession, we stay confident based on teamwork, on the competency and the dedication, the professional dedication of our people. Now -- and this is just the beginning. I'll pass to Carla for the questions and answers.

Thank you, Roberto. The first question that we received comes from Rodolfo De Angele from JPMorgan. It's about new production curve. So with the lower CapEx for 2020, how do you expect to see production curves in 2020 and in the following years, 2021 to 2024? Capo?

Rodolfo, about this question, what I can tell you is I think that's too soon to talk about what is going to be the production curves because we are really living the effects of the COVID-29 (sic) [ COVID-19 ] and also the effect of the reduction on demand and prices. And so what we are seeing is that we need some more time to stabilize the whole process and see what's going to happen in the future. If we have the same situation that we are living today, and in fact, what we see is that every day is a new day, every day, the world changes completely. But if things stay in the same, I should say, the same level of the effect of the COVID-29 -- COVID-19 and also about the lack of demand and price, maybe we could -- I think that I can tell you that the figure for 2020, we don't have a new target for this right now. So if things continue like that, maybe it's a possibility that we could reach this figure considering the 2.7%, plus or minus 2.5%. But it's too soon, I think that we should wait a little bit more to see what are going to be the effects, the real effects. And because everything is changing every day, so it's too soon to tell you about what is the impact on the curve, the production curve for the -- even for the year 2020.

Thank you, Capo. The second question from Rodolfo, it's for Anelise. It's regarding refining. So do you plan to shut down refineries as well or to lower operating rates? Are there maintenance shutdowns that will be done earlier than originally planned?

Rodolfo, in fact, what we see, we saw these last days and weeks is that our refining operating rate is around 74%. If you consider the average of 2019, was 79%. We have already a reduction in our refining operated -- operating rates nowadays. But we foresee a reduction in the demand of oil products. And probably, we'll have some reduction in this operating rate for April and May, especially these next 2 months. But nowadays, as I said, it's around 74%. We are, in fact, postponing our maintenance shutdowns because we don't want to have many people together in the refinery. We want to reduce the number of employees working during this crisis in order to avoid contamination and the effects of the coronavirus. So with the maintenance, we have lots of people working in the -- inside refinery and this is not good for the moment. So we are postponing some of this maintenance. And this is alongside, I would say, together with the evaluation of the market conditions in terms of oil products demand.

Rodolfo, I'd like to stress that we are living under uncertainty. We are not in a situation similar to someone who is locked in a backroom. We can see almost nothing. So our response to the crisis announced is not -- is far from to be completed. We are studying additional measures, including a full review of our portfolio of products.

We have a question from Bruno Montanari of Morgan Stanley. So on this resilience plan, which level of oil prices did the company used to establish the necessary CapEx and cost-saving initiatives? There's another question as well. How farther would be able to cut CapEx? What is the absolute minimum to run the operations and avoid an excess production decline? So Andrea, please?

Okay. Bruno, thanks for your question. We run lots of scenarios and some will go into Part 225. That is a level we see -- that was the lower level we saw up to now, so we run lots of scenarios. But what is certain right now is that any scenario we run is wrong because we really don't know what will be the real scenario. And definitely, we combined, in our scenarios to take action, some demand impact as well. But again, this is the -- we have to do that because we have to build the mitigation plans to, how can I say, to be prepared for that. And that's why we took the actions during as we keep them for disburse the credit facilities. But we -- it's hard to tell right now what will be the real scenario. How further can we be able to cut Capex? Again, we did the -- in these 2 weeks, we were able to run the first step of analysis together with the team, and we got to a relevant reduction in the CapEx. So we believe that was like $2 billion, we believe, the FX at $1.5 billion additional that we believe we are going to do. And definitely, that encompass our 12 items including the postponement of exploratory activities in the pre-salt, some construction and interconnection of wells that we will need to postpone, plus postpone our construction facilities and refining, so postponement of payments of goods. This was the first step. We will continue to pursue and to look for other opportunities, but that's what we have for now.

Thank you, Andrea. We have questions from Frank McGann with Bank of America. So the first question, also to Andrea, is how much flexibility is there to renegotiate service contracts? When could this start to affect costs? Could this, over time, further lower breakeven prices for pre-salt?

So we started the renegotiation right now. And as you see, one of the impacts that we are considering for costs is the renegotiation of contracts. We are somehow tackling the biggest one. So as we do the 80-20 rule, and we believe, in this environment, that demand is going to be lower. And the whole economic activity is going to be low. We can get low. So definitely, this will be a very important stream of our work. And we believe this year, we already -- some of the impacts that we are showing this is already considering negotiation of contracts, but that could definitely impact on the medium to long run. And definitely, this could impact the breakeven of pre-salt as well. So this is a work that just started 2 weeks that we put all the teams together to get to this plan that we just released. But we believe we will be able to get more moving forward.

Thank you. So another question from Frank. If oil prices were to remain below $45 or $50 and assuming oil market are balanced, would this likely have an important effect on the economic feasibility of pre-salt fields that are in our current plan to be developed? How would it change your planned time line for development? So Rudimar or Capo please?

Yes. I would say that we are reviewing at the moment our economic assumption scenarios. And we will visit our project portfolio, seeking for solution for maintaining the availability of the project execution. After that, we will have a better view considering the CapEx and the pre-salt project, too. I don't know if Capo wants to add something.

I would just like to add that when you see the presentations that we have made in the last year and also this year, the beginning of this year, we were talking about having a portfolio of -- with prospective breakeven of $21 per barrel on the pre-salt. And so the thing is that, at this moment, what we have to do is not just only look for the breakeven of the process because they are really very low and they are robust on this -- on lower price for the oil. But also, we have taken into account that those lower price and also the lack of demand, those facts, they reduce the cash generation of the company. So we have to balance the value that we have on those projects with the cash generation of the company and also the question of the debt of the company. So that's something that we are still working on it. So looking just for the economics of our portfolio, it's a very good portfolio, but we have to balance this with other factors and also with what's going to happen on the progress on the -- with the contention of the COVID-29 -- the COVID-19. So that's something that we have to put all in the balance and have some time to take into account all those factors and see what's going to happen with our plan and the postponing of some projects maybe. But this is not a question that we should only look at the economies of the portfolio because it's really very good.

Thank you, Rudimar. Thank you, Capo. Our next question comes from Luiz Carvalho with UBS. So how do you see the divestments, mainly refineries, being backed by the recent events? Some of the potential buyers might have their balance sheet affected or prices for PBR assets could have a lower valuation or delay in the process? So Roberto, would you like to start?

We are going to continue with the divestment program. Of course, price -- asset price were affected by the crisis. And -- but we will go ahead with the program and observing our valuation. If price bids a lower than our valuation, of course, we are not going ahead with the process. We haven't seen any signal of lack of interest from our potential -- from the potential buyers of our assets. On the contrary, yesterday, I got a message from one of them reassuring its interest in the assets. Saying that despite the crisis, we'll continue to be interested in buying your assets. That's very good news. But again, the environment is very uncertain. So at the moment, we cannot assure you that this and that can happen.

I would like to add, just considering the divestment process that we postponed the bidding offers for daily refineries due to the -- everybody has their balance sheet affected, as you said, Luiz. But we don't believe that the current crisis will affect the price for refineries. Since we are keeping what we proposed that to keep the import -- the international parity prices, as you are seeing, so we don't leave this important target for us. And the refining in this moment are suffering from a lower crack spread. But still, we are in a good position for making the divestment process in our refineries.

Just to add, it's important to say that the 5 pillars of our strategy will continue to be implemented. And the only thing that the current crisis tells us is to highlight the importance of implementing, even accelerating some steps like cost reduction.

Thank you, Roberto. Thank you, Anelise. Now there's questions from Regis Cardoso with Crédit Suisse. So the first question is regarding our upstream operations. Why did Petrobras have to shut down production, 100,000 barrels per day until the end of March? Is it because, could not find offtakers? Can this problem aggravate and you'll be forced to extend or even deepen the production cuts? So Capo, please go ahead.

Well, I'll start, but then I would ask Anelise, if she can continue on the answer, please. Regis, the shutting in production, around 100,000 barrels per day until end of March, in fact, has to do with the lack of demand for oil, and also for oil products, so we decided to shut it down in order to have more stock availability for the oil. And as the international market is very -- there is a lack of demand in international market for oil. So it's basically due to that. Because looking at, on the other hand, to the platform that we decided to close, they are platforms, they are fields on the shallow waters of -- the shallow waters of Sergipe, Rio Grande do Norte and Ceará basins, which are assets that we had already defined that would -- they were on our divestment program. So we have decided that we would not work with them anymore because they have very high costs. So those fields, we have decided to cut -- to shut them off and to cut the production because they don't have the sustainability, when we look to -- when in regards to the economic effect of the lower oil price, so we decided to close them. But the other part of it that we are going to shut -- to reduce the production, so it has to do with the lack of demand. So it's a combination of both factors. One, that comes from the fact that we have lower oil price scenarios, so we have decided to shut down the fields that we have on the shallow waters. And the other that has to do with the lack of demand.

Just to add, regarding oil, export oil, what we have today is that our oil inventory is high. We, as you know, we just passthrough, we just went through a strike in Petrobras, so we kept our inventory high. So what we saw is the opportunity to reduce the inventory during this period. As Capo said that the demand of the oil has decreased also, and the oil price is not in a good level. So based on all these considerations, the cut on production was decided and approved by our board.

And just to add, that's something that we have decided, is cut off 100,000 barrels per day of oil. We have decided to do it until the end of March. And for sure, every day, we are evaluating the whole situation and what's happening on the world. And maybe we could have to cut a little bit more at the -- on April or maybe we will not have to cut it. So we are -- we have to delay it because the world is changing every day.

Thank you, Capo. Thank you, Anelise. Our next question also from Regis is regarding downstream. So demand has decreased very substantially and probably and evenly across the several products. I imagine jet fuel gasoline were most affected, whereas diesel domestically may have been more resilient. How can you adjust the refinery runs? Can you substantially reduce the yields of these products? Or do we risk the eventually fill up storage capacity and constrain refining process? Anelise, go ahead, please.

Regis, this is a very good question. And of course, it demands lots of simulations and runs to optimize the processing capacity of the refinery during this period. You're right, the jet fuel has decreased -- demand has decreased a lot. And also, we are seeing, a decrease in gasoline. Diesel also -- presents also a decrease but not very high due to agribusiness that is keep going. And also what we see is still a good appetite for bunker, for our fuel bunker. So what we are doing is that we are continuously modeling this scenario in order to evaluate the possibility of the refinery to increase the production of these oil products that presents -- still presents a good demand than trying to decrease others. It's not a simple equation because if we want to, we can make this scenario. But of course, we'll have some increase in gasoline in some inventories that we don't need for the moment. So we'll have to see if there is room also to export some of these products. But still, we are working on optimizing the refining part in order to produce -- to increase the production in the products that still have a good demand.

Just to add about diesel demand, alongside with the demand for bunker, the Brazilian harvest is expected this year to hit, reach an all-time high. So it implies growing demand for diesel. And this minimize -- of course, it does not offset the negative impact of the global crisis on the demand for fuels. But at least, it's a positive factor that minimize this impact.

Thank you, Roberto. Thank you, Anelise. The next question comes from Pedro Medeiros. So it's one question with a series of question marks. So I'll start. Does the investment cut for 2020 impact any of the expansion projects and CapEx plans for 2021 forward? What's the minimum and maximum oil breakeven for the company's current expansion products? What's the flexibility to cut? [indiscernible]

[ Foreign Language]

So Capo, can you start about talking about the expansion of projects that are planned for 2021?

Okay, Pedro. Thank you for the question. In fact, we look at the CapEx and also the operational expenses for the year 2020, but also for the CapEx that right now we were to be evaluating and also to be on the process of the procurement for the CapEx for the years to come, and then years, for the 2021 forward. So what we see right now is that we have CapEx on the exploratory for the wells that would be drilled on the 2021 for some wells on the areas of the production sharing contracts. And we could have some postponing on the CapEx for some projects on the 2021. But in fact, we don't know the effect right now about what's going to happen on those projects because we have to some -- not only the effects of postponing some -- the reimbursement of some CapEx that we think that we will not have any effect on our plans. So looking on a first view about what we have cut so far, we could say that it would impact more, the plans for -- the plan on the year 2024 and later. But we have to combine this cut on the CapEx that we are doing this in order to have a good liquidity for the company. We have to combine this with other effects, on the effect that can concern someone and then specifically us about the effect of postponing some projects. But due to the effect of the COVID-29 -- COVID-19. So we have to combine all these effects and see what's going to happen in our plan. But for -- until now, what we have cut is only in -- what we are focusing now is to postponing and to cut some CapEx that should not impact very much our plan on the year 2021 forward. But there are other effects that we have to sign up in this evaluation and also the effect of the impact on the generation -- the cash generation and also the impact that we have to balance it all with the control of our debt. So it's a complex problem that we have to put it all together and see what is going to be the effect that -- all the effects combined.

So maybe just for a breakeven.

Let me add something. Sorry. Go ahead, Andrea?

Sorry. Because the next one will be about breakeven on the projects. And as Capo said, now it's not just about breakeven. But just going back to the presentation we did at the end of the year, the prospective breakeven for the overall E&P is $25 per barrel and the prospective breakeven for pre-salt is $21. So in this sense, we are very, very resilient, and the process continues to be very good. But definitely, that will be like a big equation that we need to put everything into, how can I say, into the decision-making to see what will be the company moving forward is not just breakeven, it's about breakeven and leverage and all the things that we have to consider together. So sorry, Rudimar go on.

No problem. Just to add what you have said in the middle of this complexity that Capo mentioned and Andrea reinforced, we have a lot of procurement process in the initial phase or in the middle of the process. Depending on this reassessment, we will have to review our procurement initiatives, and it will certainly affect the CapEx in the future. Just that.

Thank you, Capo. Thank you, Andrea. Thank you, Rudimar. The next question comes from Andre Hachem with Itaú BBA. So specifically about the platforms. So how is the current platforms schedule, especially the units that are being -- that are yet to be hired going to be impacted by the current crisis? Should we expect any delays in that regard? So Rudimar or Capo?

Yes. I would like to say that after the crisis in China, we are trying to measure what are the impact of the construction of the FPSO in China that we'll talk with this question. And after this information, we can analyze better what will be the impact not only in the special construction but in the subsea and drilling activities. And with this analysis, we will have a better idea how to beat the impact in the production for the future.

Thank you, Rudimar. We have one more question from Andre. So we've seen a large disparity between Petrobras fuel prices and those practiced in the international markets over the past weeks. Could you please comment on the rationale? [indiscernible]

Going on the international prices, following, very strictly the, international price, you have to be adjusting price every hour or even every minute. We do not use daily price changes. We don't want to add more volatility to the market, so we observe the price trend after some days and then change price. In the case of gasoline, we have reduced the price by 40.5% this year and we can discuss other cuts. Price of diesel is down by almost 30%. And we are following this, and we are seeing signals of decrease in imports. So this gap is not as significant as you are mentioning. And we are pursuing to maintain our policy that to -- of equalizing domestic price to international price given the cost of freight and insurance and internal risks.

Nothing to add. Roberto was perfect.

Thank you, Roberto. Thank you, Anelise. Now there's a question from Vicente Falanga with Bradesco BBI. What do you mean by working capital utilizations? Will Petrobras force its chain of clients to make faster payments? Doesn't the company fear this could bring liquidity issues with smaller distribution companies and gas station owners?

I would like to take this one Carla, if you allow me.

Go ahead, Andrea.

So we are not going to do crazy things. I think Roberto said a very important point that we are working definitely to avoid the cash impact on our cash flow in 2020 and after we did, up to now, we believe it's sustainable. What we will be working to do soon, definitely looking for the big suppliers. We are not talking about affecting the small suppliers. But we will do other stuff. So we will try to reduce inventories that will definitely allow us to reduce working capital. We -- depending on which is the supplier, we can definitely work with average increase of terms. But definitely, it's going to be focused on the biggest ones and not on the smallest ones. The renegotiation of contractual terms, in general, even looking for reductions of cost due to the overall reduction of the economy. So we already mentioned the mothball assets in the shallow waters. So we will reduce the production in those places that doesn't make sense. I think we have other actions that are not going to be focused on affecting the suppliers that are going to suffer more than us.

I'd like to add, Andrea, that the new division that was created, logistics, will take care of managing inventories. This express our concern. We have more efficiency in inventory management in order to reduce working capital.

Considering the distribution companies and gas station owners, we have been discussing a lot with the distribution companies these last days in order to assure them to provide the oil products that are -- to comply with the demand. And of course, we have contracts that must be obeyed. In this case, we have some flexibility in terms of take-or-pay and that we could use in order to overcome the crisis.

Thank you, all. Vicente also has another question regarding oil prices. So if oil prices continue at $25 to $35 a barrel through the next 6 months, will the company announce more cuts to the output?

Maybe for me, Andrea speaking. We already tested all those scenarios, and it's not -- we are not just testing price impacts, we are testing demand as well. And we will look definitely for more cost reduction. This is something we will continue doing. But the scenarios that you mentioned, they were already tested. So we believe under those scenarios will be really good. It's not a big issue, but looking for more cost reductions, definitely, we will keep doing.

And just to add something to this, Andrea, is just to -- and think about it. We have, it's -- for sure, it's something that we are doing right now is to check and see what are -- what is the possibility to reduce the production on the fields that we have and maybe even on the onshore. That's something that is working -- thing that -- this is something that is still a work in progress. But if we look at the cut on the production that we are doing right now, 20% has to do with the shutting of the fields that we have on the shallow waters and 80% with the lack of demand. So if we have to do something in the future about cutting more of our production, it will have more to do with the lack of demand if it continues to do so, if it continues to be like that, and less with the lack of feasibility of our fields, especially because we have to take into account that if you shut a field, we still have to manage the costs that have to do with those fields. And that -- sometimes it's not easy or fast to get rid of those costs.

Thank you. So we have questions also from Lilyanna Yang with HSBC. So Capo, any impacts on operations from COVID-19 lockdown? Any impacts on output for production volumes?

So far, we don't have an impact. But for sure, it's something that's a very important point. Every day [indiscernible] Brazil. And so we have to be -- we have to have a lot of attention on aspects like that. [indiscernible] feeling any impact and [indiscernible] managed very well. This is of the COVID-19 [indiscernible] and what we are doing in [indiscernible]

[indiscernible] short-term debt maturity.

Okay. So thanks for the question, Lilyanna. We -- for the short term, we had $3.6 billion of third-party debt $0.9 billion of lease that we have to pay during the year. We are considering definitely with the scenario we're running that we can pay those liabilities. But we are working with some banks, bilateral ones to roll some of the short-term over. So some will be paid, and that's the scenario we're running right now, and some will be rolled bilaterals. That's the plan.

Thank you, Andrea. And the next question is from Thiago Duarte with BTG Pactual. So is it safe to say that Petrobras continued investing in the pre-salt even under lower oil prices assumptions? Capo, can you go on?

Yes, as I said before, and also Andrea has mentioned as well, we have a portfolio of projects -- of pre-salt project that is very robust. And going back to the presentation that we have made since last year, the breakeven of our portfolio is $21 per barrel. So we are still keeping the same strategic approach that we have on our strategic plan. But the speed of this -- of the execution of this plan is that something that we have still to evaluate what's going to be the real impact of the things that we were living today, lack of demand and also the impact of the COVID-19. But regarding the economics of the portfolio, it's really very robust and good. And so our focus continues to be and will continue to be the pre-salt.

Capo, I'd like to add also that we have many initiatives to reduce the CapEx, mainly in pre-salt that will help us for that.

Thank you, Capo. Thank you, Rudimar. At this time, so our question-and-answer session is over. If you have any further questions, you can send this for the Investor Relations team. So Roberto will now make his final remarks. So please, Roberto.

First of all, I'd like to pass the message that despite all the complexities and difficulties in this scenario, we are confident that by the end of the day, we'll win. We have highly qualified people, highly dedicated professionals. We are responding fast to the crisis. We have no taboos, no sacred cows. We will do what's necessary to do. And last but not least, I'd like to thank you for your interest in the -- in our webcast. Health to all, and we are looking forward to see you soon. Bye.