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

Hello, everyone. Welcome to Petrobras' webcast with analysts and investors about the second quarter 2021 results. It's great to have you join us today. 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 us questions by email at petroinvestor@petrobras.com. We also inform you that all executives are participating in events remotely in their individual rooms, respecting all security and safety protocols. Today, we have with us Claudio Marcelle, Chief Trading and Logistics Officer; Fernando Bode, Chief Exploration and Production Officer; Joao Rittershaussen, Chief Production and Development Officer; Nicolas Simone, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations and Sustainability Officer; Rodrigo Araujo, Chief Financial and Investor Relations Officer; Rodrigo Costa, Chief Refining and Natural Gas Officer; and Salvador Dahan, Chief Governance and Compliance Officer. To initiate, I will pass to Rodrigo, our CFO. Please, Rodrigo, go ahead.

Thank you, Carla. Thank you. Hello, everyone. It's a great pleasure to be here with you today talking about our second quarter of 2021 results. We had a very impressive quarter with substantial results, and it's -- I'm very glad to be here with you today. Thank you. Next slide, please. So, starting with our safety metrics, it's very important to report that we're continuing to comply in the first half of 2021 with our 0.7 level of alert with respect to total recordable injuries-per-million-man-hours. And of course, you always know that we have a zero-fatalities ambition, and we unfortunately had 1 fatality in 2021, but we're always working to improve safety. It's an unconditional value for Petrobras, and we're always focused on improving safety. And we're very glad to be below our alert level of 0.7% for 2021. Next, please. With respect to our emission indicators, it's important to see that in terms of carbon intensity in our E&P operations, we are significantly below the level that we set as a target for 2021, and we're already below 2020. During the year of 2021, we had the ramp-up of important production units, and we have already reinjected 4.3 million tons of CO2 during this year, which is already the same level of 2019, and we expect to have a higher level when compared to 2020 as well, so we continue with our lower carbon footprint and reducing our emissions significantly. When we talk about our carbon intensity in the refining operations, it's important to realize that we had several scheduled stoppages. We had 6 scheduled stoppages in 2021. And in spite of that, we're still maintaining the same level of 2020, and we believe that we can recover during the second half of 2021 and achieve our goal for the year 2021. And we have already announced earlier this year, our [ Raft Up] program, which is a very important program focused on improving the energy efficiency of our refining operations, and we're, therefore, highly focused on reducing carbon intensity in our refining operations. Next, please. When we look at the highlights of our operational and financial results for the second quarter of 2021, these results reflect very clearly our commitment with executing our business plan and our disciplined focus on our strategy. So we have very important results for this quarter, which is something that the company has been working on since basically 2015, 2016 to manage this portfolio to have a very resilient portfolio that is resilient to lower prices, and also is able to capture the upside of scenarios like the one we're seeing in 2021. We set the company for a $40 Brent price for the year 2021, and what we see is significantly above that. And we have been able to show in the second quarter of 2021 that our portfolio is capturing all the upside that is related to higher Brent prices. We had a recurring adjusted EBITDA of $11.4 billion and an EBITDA margin of 54%. Also, we had $10.8 billion operating cash flow, and our very substantial level of free cash flow as well, after our investments of $9.3 billion in the second quarter of 2021. This is, of course, the result of a very important operational performance, with higher exports of oil and oil products. We're also diversifying the destinations of our exports, of course, always focused on generating value and trying to find the best consumers for our oil in the international market. This is a very important movement, and we see oils like Tupi, Buzios, [indiscernible] more and more recognized in the international market as well. We had in the second quarter, higher margins and the higher sales in the domestic market, as well, from our refining operations, especially diesel and gasoline in the Brazilian market. And it's good to highlight that the second quarter is not our highest volume in terms of seasonality, so it was a very important result to have such high volumes in the second quarter of 2021. When we look at our gross debt reduction, we reduced our debt in the second quarter by $7.3 billion, reaching a level that is substantially below the target that we set for 2021 of $67 billion. We're already in $63.7 billion for 2021. And of course, we're highly focused on reaching our $60 billion debt target, which is something that continue at this pace that we have now, we believe that we can reach $60 billion debt target by the end of the year 2021. We also had the support of important cash flows from our portfolio management strategy. We had inflows of $300 million in the first half of the year -- in the second quarter, sorry. And we also had the follow-on transaction of our remaining shares in BR Distribuidora of $2.2 billion. This cash inflow happened in the beginning of the third quarter, in July. We had a positive impact in our earnings for the second quarter of the reversal of the impairment that we had in BR Distribuidora, but the cash inflow actually happened in the second -- in the third quarter, in the beginning of July. And of course, we had earnings of $7.7 billion in the second quarter of 2021. This was positively impacted by our very substantial operational performance, and we also had a positive impact of foreign exchange gains that are noncash, but they impacted positively in our second quarter results. With all the debt reduction that we had and with CapEx discipline, the cost discipline that we have and the portfolio management strategy that we have in place, we're -- we've been able to approve and announce anticipated dividend distribution of $6 billion for the second half of 2021, part of it in August, part of it in December of 2021. And we're very glad to announce that, and of course, we're trying more and more to balance our focus on debt reduction and getting to the $60 billion debt target, but at the same time, being able to add value, to generate value to reduce our debt with the lowest cost possible for prepayments and for debt reduction, at the same time, being able to balance that with dividend distribution for our shareholders. Next, please. When we look at the external environment, rent prices were 13% above the first quarter of 2021 in the second quarter, which of course, as I mentioned before, we were able to capture these additional prices with our portfolio, which is a very cost-resilient portfolio. When we consider the average exchange rate, real/dollar for the period, we had a slight reduction of 3%. So, on average, we have an important improvement in margins and prices for the second quarter of 2021. And as I mentioned before, when we consider the [indiscernible] exchange rate, we had an appreciation of the Brazilian real during the second quarter of 12%. And this, of course, impacted positively our earnings for Q2 2021, but it's noncash. Next slide, please. It's very interesting to see the trajectory of our gross debt over time. If we go back a couple of years, we can see that in 2015, we had a total gross debt of $135 billion. And without considering the leases, that only became part of our debt as of January 1, 2019, when we implemented IFRS 16, so it's basically a $90 billion debt reduction from 2015 to 2021, which is a very impressive result. And as I mentioned, we are already below the target that we set for 2021, and we've been more selective in trying to balance value generation and dividend distribution with reaching our gross debt level of $60 billion by the end of 2021. Of course, it's very interesting to mention as well that we have a net debt-to-EBITDA ratio much closer to our peers' now. This is, of course, positively impacted by the level of EBITDA that we have, so it's important to continue focusing on reducing our total debt as well. But it's a very important result of 1.49x. And when you look at the ratio between our cash flow from operations and our interest payments, we already have something around 12x, which brings us much closer to our peers', and that's a very important trajectory of reducing our leverage, and therefore, making the company more sustainable and more reliable and resilient to challenging scenarios. Next slide, please. When we look at the results in terms of EBITDA for the second quarter, as I mentioned before, we had a very important quarter, very important operational results. So the increase in oil products margins and increase of exports as well and sales reflected in an increase in our recurring EBITDA of 31% to $11.4 billion in the second quarter of 2021. And of course, we also had a positive -- when we look at the adjusted EBITDA, we had a positive impact of the decision, the gain that we had related to the exclusion of the [ AT ] of ICMS that is a state-level taxation in Brazil from the calculation of [indiscernible] fees, but it was a very impressive results in terms of our operational performance for the second quarter. Next, please. Looking at the dynamics of the results by business segment, we can see that our Upstream segment captured an upside of 20% from the second quarter when compared to the first quarter. We had higher Brent prices, also an increase in our production. We had a 2.8 million barrels of oil equivalent production in the second quarter of 2021, and 70% of that is already represented by oils from the pre-salt layer, which are very resilient in terms of costs, and of course, in terms of emissions as well. So we're very glad to see the successful results of our exploration in the pre-salt area. When we look at the Refining, Transport, and Commercialization segment, even when we look at the performance at replacement cost, excluding the inventory turnover effect, we had a very positive quarter. We basically more than doubled the results from Q1 to Q2, with higher margins and higher volumes in the sale diesel and gasoline in the domestic markets. And we also have a very -- a lower inventory turnover effect when we look at the results of our EBITDA with inventory turnover, but it's still a very important performance for the RTC segment. And looking at the Gas and Power segment, we had a 20% increase in the results of Q2 when compared to Q1, with the recovery of the natural gas margins due to higher prices and, of course due to higher non thermal demand, and to the improvement in the Brazilian economy that also improved the levels that we sell of natural gas. Next slide, please. When we look at the cash generation and how we use that cash during the quarter, as I mentioned before, we have a cash flow from our operations of around $10.8 billion and investments of $1.5 billion, so we had a free cash flow of $9.3 billion and $0.3 billion inflows from our portfolio management strategy. And that results in $9.6 billion of free cash flow after divestments. And we basically used all that free cash flow to prepay debt. And when I mentioned the efforts that we're making in terms of liability management, it's also important to include the pension plans that we've had a [ $0.4 billion] prepayment in the second quarter of '21, which is, of course, a more expensive debt that we have. So we're also trying to manage our liabilities in a more structured and consolidated way, looking both at our finance debt and pension liabilities as well. And of course, as I mentioned, the level of free cash flow that we have, way above what we expected for the year 2021 and the successful movement that we have towards achieving the $60 billion debt target is enabling us to anticipate dividends, so that's also very important for the company. Next, please. We're also focused on improving the profile of our remaining debt. We had a very important transaction in the second quarter of 2021. We issued $1.5 billion, and we had an almost simultaneous tinder offer as well. We were able to have the lowest historical yield for a 30-year bond for Petrobras in the history of the company. And we also made substantial prepayments and repurchases, both in the debt capital market and also with bilateral transactions with the banking market as well. We improved the average maturity of our debt to more than 12.5 years and reduced the cost to 5.9%, so this is a very important movement, especially considering the challenges around the energy transition. So it's very important for us to be able to continue improving the maturity and reducing the average cost of the remaining debt, alongside with reaching the $60 billion debt target that we have. And also, we had important news from S&P during the second quarter -- during the third quarter, sorry. In the month of July, S&P announced an upgrade in our stand-alone credit rating, so this was also very positive and reflects the successful financial recovery of Petrobras. Next, please. In terms of portfolio management, it's important to highlight the transaction involving the remaining shares that we had of the BR Distribuidora, and that's a $2.24 billion transaction. As I mentioned before, it was a follow-on transaction in capital markets, the largest transaction in the Brazilian market for 2021. The cash inflow happened in the beginning of July, so it's of course supporting our deleveraging and dividend payment. We also had relevant signings during year 2021, especially in the movements that we're making in terms of opening the natural gas and the refining market. We had the signing of [ RLAM], an important refining plant. We also had a signing of Gaspetro now in July as well, so we had important movements. And also, when we think about E&P operations, we also had signing of transactions involving onshore and shallow water fields that were very substantial during the quarter. So, during the year, we had a total of $5.7 billion in transactions and already have a cash inflow of $2.8 billion in 2021. Next, please. So, this is just a general picture of what's happening in all the portfolio management projects that we have, and you can see that the ones that have the yellow box are the ones that have movements in the second quarter. So you can see that several processes advanced during the second quarter, both in terms of signing or closing of relevant transactions, so we remain very committed to our portfolio management strategy. Next, please. So, in terms of earnings, we had $7.7 billion of recurring net income for the second quarter of 2021. As I mentioned before, this is the result of a very important operational performance and alongside with a positive impact of noncash foreign exchange gains, given the appreciation of the Brazilian real, with the [indiscernible] Brazilian real that impacts our exposure in terms of dollar index gross debt, so this was a positive impact for the second quarter of 2021. We also had earnings related to a reversal of impairment in BR Distribuidora, and also the important results of Braskem in the second quarter of 2021. Next, please. So finally, as I mentioned, it's -- we approved anticipated dividend distribution of $6 billion, which is more than -- it's around 3x the average dividend distribution for the last 3 years. And it's divided into a first payment in August 2021 and a second one in December 2021, which is a very important movement from the company, reinforcing our commitment to add value to our shareholders, and of course, the Brazilian society as a whole. And it's an important movement of balancing our deleveraging strategy with the remuneration of our shareholders. And as I mentioned, we're being more and more selective in terms of the next steps for our deleveraging, so that we can reach that $60 billion debt target by the end of 2021, but generating the highest value possible. So that's my last slide. Thank you very much for being here with us today, and we move on with Carla to the Q&A session. Thank you.

So the first question that we receive comes from Luiz Carvalho with UBS, and it's for Mastella. Mastella, we have been following company pricing policy in a very detailed way for a long time, and we still see changes on the approach through the years. In certain times, we saw more frequent adjustments, on others a gap closer to parity, and now calls our attention that price moves are less frequent and with a higher gap than before. Why do we see different approaches to this subject over time?

That will help me clarify, I hope, some issues in the subjects so many times criticized, either for being too low or being too high [indiscernible]. First, we must say that the alignment of prices with international markets is essential to ensure that the Brazilian market continues to be supplied without risk a shortages by the different suppliers, either distributors [ in quarters] or other producers, in addition to Petrobras. In the first quarter, trying to take more specifically on your question, the increase in international prices and the exchange rate, Brazil/dollar, require more frequent adjustments to the domestic price. More recently, in the last month, the variations in international prices, and at the same time, in the exchange rates to have often moved in opposite directions. We had to [indiscernible] compensation between them. As a result of this, less frequent price adjustments were needed in second quarter. Well, some of our prices continue to seek balance with the international market, following the changes in [ value products] and the exchange rate up and down, trying to avoid -- it's important -- trying to avoid the transfer to internal prices of the external volatility caused by [indiscernible] events for our market movement. The continuing monitoring of the markets by our team remains unchanged, which includes, among other procedures, the daily computation and analysis of the behavior of prices in relation to international prices, competitive prices, and the planning of actions to correct deviations. Because the regular and the interrupted prices of other players in the Brazil market, especially in quarters, is showing that our prices remain aligned with the international market. Thank you.

The second question from Luiz Carvalho is for Rodrigo [indiscernible]. So, on the Gaspetro divestment, we saw some recent news about the potential remedies that could be imposed by the antitrust body. Did the company have interactions about the potential solutions to move forward through the process prior to the binding phase? And what about Braskem? Any news on this potential divestment?

Thank you for your question. Well, first of all, with respect to the agreement that we have with the Brazilian antitrust body with respect to the opening of the natural gas market, the [ CAGR] antitrust body is closely following all our movements, and of course, is following up on all the sale processes that we have. And of course, Gaspetro was a relevant one within this context. And it's good also to give you a more general perspective in terms of next steps because, first of all, we have the state-level governments that have shares in those natural gas distribution companies, so they have preferred rights that can or cannot be exercised. Then later on, we still have Mitsui, which is our partner in Gaspetro, which can exercise their right as well. And then we have the Brazilian antitrust body analysis that, of course, we expect to be a complex one, given the nature of the natural gas distribution market and the complexity of the transaction. But we are highly focused on concluding the transaction, and we are positive that the resolution with the antitrust body will be positive in the end, and we'll be able to conclude the divestment of Gaspetro. With respect to Braskem, of course, we've been following up on the movements of Novonor that is of course a relevant shareholder Braskem as well. And we have already engaged financial advisers to support us in several possible strategies for conclusion of the divestment and to add value for our portfolio. So, we don't have a definite answer with respect to that at this point, but we are moving forward with potential different paths, and we're focused now on realizing the highest value possible in the divestment of Braskem. Thank you for your question.

The next question comes from Rodolfo De Angele with JPMorgan, and it's for Mastella. Mastella, so about fuel pricing, how are talks the government about the possible fund to stabilize price? Has Petrobras been involved in these discussions with the government?

Well, as I said, it is very important that Petrobras continues to practice prices in balance with the competitive markets. This economical reason doesn't apply exclusively to its own products. Other commodities traders in Brazilian markets or [indiscernible] market, such as food, ore, and metals, also have their prices associated with variations in international market and the exchange rates. Well, using this economical logic in respect in this, there is naturally an incentive for investments and attraction of new players to Brazil, which contribute, we believe, to the increase in the local offer of products with direct benefits to the consumers. On the other hand, prices are out of line with the market [indiscernible] value would compromise the industry's investment capacity and interest, which can lead to assets [indiscernible] and increase the risk of shortage. Likewise, we do actively contribute to discussions within the Ministry of Mines and Energy in Brazil regarding possible problems, such as price, stabilization, and [indiscernible]. Thank you.

The second question from Rodolfo is to Rodrigo. Rodrigo, about asset sale, please provide an update on refineries in other key assets. We are on mute with you.

Sorry. Last time I wasn't visible, now I was muted. Thank you, Rodolfo, for your question. Well, first of all, it's -- as I mentioned during the presentation, we had, of course, signed and closed important transactions during the year 2021. Of course, BR Distribuidora is the most relevant one; that happened in the beginning of July. And as I mentioned, we are highly focused on concluding the transactions, both in the agreement that we have with [ Kaji ] for the natural gas market, and for the refining market as well. We are, of course, highly focused on closing the transaction regarding [ Hila ], which was signed in March this year. And looking at the process as a whole, where we have [indiscernible] in 6, a little bit more advanced. And we are in the negotiations in different stages for [indiscernible]. We have the agreements with [ Kaji ] in terms of deadlines, and we're focused and committed to comply with those deadlines. And in terms of other relevant assets in the presentation, I showed a slide regarding the advancement of other processes. As I mentioned, we had the signing of Gaspetro recently. And we also had other important assets, both in onshore and shallow water E&P assets, so we're very glad with the evolution of our portfolio management strategy and focused on concluding additional transactions for the year 2021. Thank you.

The next question comes from Bruno Montanari with Morgan Stanley, and it's also for you. So, regarding the enhanced dividend policy, once the debt targets are met, how should we think about the actual implementation of the policy? Would the higher payments come only at the end of the fiscal year, be it 2021 or 2022, or would management be inclined to start distributions as soon as possible? On that aspect, is there a preference for quarterly, semiannually, or annually dividend distribution?

Well, first of all, it's important to see that 2021 is, of course, a transition year, an important year in terms of our target to reduce gross debt. We expect it to reach the $60 billion debt target only in 2022. And of course, given the much more favorable conditions in 2021, we've been able to move much faster. And at the current pace, we expect that we may be able to reach the $60 billion debt target closer to the end of the year 2021. So it's -- now it's more of a transition time. And, as we announced in this quarter, we want to make sure that we can balance our focus on reaching the $60 billion debt target with potential dividend distributions. And we want to do that, adding as much value as possible, so we see that the timing of the prepayments is relevant. Of course, we want to get to the $60 billion debt target, but we also want to do that, generating more value. So, once we reach the $60 billion debt target, of course that we expect to improve our dividend payments and start applying the 60% dividend policy, 60% of our free cash flow. But as I mentioned, 2021 is a transition year, so we will try to balance those 2 aspects of distributing more dividends and reaching the $60 billion debt target. In terms of preference with respect to quarterly, semiannual, or annual, we don't have an explicit preference. Of course, we want to balance the financial sustainability of the company, and we'll continue to monitor the scenario to see how can we best balance the sustainability of the company with the distribution. But it's important to highlight that we are highly focused on improving dividend payments and complying with our dividend policy. Thank you.

Bruno has another question for you as well. So, thinking about energy transition, the company hinted that the upcoming business plan would bring more emphasis on this important topic. When does the company expect to announce the updated plan? Is the mindset increasing the investment level to address energy transition, given that Petrobras is generating very healthy cash flows? Or is the mindset to stay at a similar investment range, with a different composition between fossil fuels and energy transition projects?

Well, first, with respect to the timing of the business plan, we expect to announce the business plan closer to the end of the year, November or beginning of December. But in terms of a general picture, we're of course analyzing closely the energy transition subject. And of course, we have to be very careful with the movements that we make, especially considering that we have a very resilient portfolio. We have a portfolio that has significant competitive advantages, both in terms of being resilient to lower oil prices and being environmentally resilient as well. And we see that a profitable diversification is a challenge for the industry, so we want to make sure that whatever decision we make in terms of diversification is one that is accretive in terms of value and creates value to our shareholders. So this is a very important aspect for us. And of course, we want to keep our commitment with having a $35 price target for approving projects and being environmentally resilient as well. So we acknowledge that you have -- we have to keep moving towards the ESG agenda, but we want to make very -- make movements that are both sustainable and that we are always focused on adding value to our shareholders. Thank you, if you want to jump in as well. Thank you.

Yes. Just to add what Rodrigo just mentioned that we don't see a competition of projects when we see fossil fuels and energy transition, but rather, a synergy. And Petrobras has been very focused on that since the early stages of our production in the Santos Basin, the pre-salt. We have been very focused on the reinjection of CO2, for instance. And this creates a double advantage. We are not putting in the atmosphere all the CO2 that has been locked in the reservoir for millions of years, but also, we are able to improve the recovery factor of the reservoir. The same happens when we study right now the second-generation of biofuels, the green diesel and the jet, biojet, aviation biojet. And then we are going to be using room that we have at hydrogen plants, in our refining plants, to foster the use for those plants with that end. So working in our own process, understanding how we can improve our carbon results in terms of oil and other products is key to the future of this energy transition, because with this strategy, we are going to be able to offer to the market in the future products, a range of products that are competitive in price, but also low in terms of carbon emissions. That is the strategy, and we are going to be studying those kinds of projects in the upcoming strategic plans that we will announce in the end of the year. Thank you.

So the next question is from [ Andrea Shen ] with [indiscernible], and it's for Fernando. Fernando, with the upcoming transfer of rights auction, would Petrobras have the appetite to be the sole operator on those fields, or is the company actively discussing with partners?

Our strategic plan has a guideline for us to act in partnership. And with them, with this approach, we share risk, we share costs, we share investments and benefits. So Petrobras is seeking for good partners for the next bid round.

The next question comes from Vicente Falanga with Bradesco, and it's from Mastella. Mastella, did Petrobras incur any losses importing diesel in the quarter? If yes, could you provide us a ballpark estimate on how much?

I can answer that by repeating that the prices of other agents in Brazilian market, especially fuel importers, indicated Brazilian prices are in line with international parity. For your reference, our diesel market share decreased in the second quarter from 87 [indiscernible] only 7% on the first quarter to 83% for the second quarter, reflecting the increased prices of our other suppliers. Worth mentioning that competitive prices in Brazil take into account not only international prices, but also values that added to them, such as flight costs and some that are subjected through, for example, U.S. prices, such as a [indiscernible], which is the [indiscernible] obligations, which is a cost added to the published prices of gasoline, for example in diesel in U.S. We have to remove that from enterprise when we compose our import parities in Brazil. [indiscernible] the domestic prices and their margins cannot be directly perceived as a sum of international prices. I hope to be clear with that. Thank you for the question.

The second question from the Vicente is for Joao [indiscernible]. So, Joao [indiscernible], could you please provide updates on the [indiscernible] FPSO? In what quarter of 2022 are operations expected to start up?

FPSO [indiscernible] is the [indiscernible] unit of Buzios field. It is under construction in the [indiscernible] in China. We already started lifting the models in April 2001. We are facing some challenges about the COVID-19. But until now, we have scheduled to start the production until the end of 2022. I'd like to address the development of the field. You have already 4 units in operation. You already have the Buzios 5, you have Buzios 6, 7, 8 already hired and the under construction. We are in the bidding phase of the Buzios 9, the [ T-80 ] unit. We, as upstream segment, [indiscernible], we are working hard in order to reduce the time to -- we start production of all these new units, and they had high efficiency when they start operations. Buzios field is bringing a lot of value to the company. And we understand that it is very important to speed the first oil date of all the units that are in the construction phase. Thank you for the question.