Petróleo Brasileiro S A Petrobras : Transcript First Quarter Results 2020 May 15, 2020

Webcast - First Quarter Results 2020

May 15, 2020

Carla Albano:

Good morning, ladies and gentlemen. Welcome to Petrobras Webcast with Analysts and Investors about the 1Q20.

We would like to inform you that all participants will follow the transmission by Internet as listeners. After the introduction, a Q&A session will begin. You can send us questions by email, [e-mail].

Today with us: Roberto da Castello Branco Petrobras' CEO; Andrea Almeida, Chief Financial and Investor Relations Officer; Anelise Lara, Chief Refining and Natural Gas Officer; André Barreto Chiarini, Chief Logistics Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Nicolás Simone Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations Officer; Rudimar Lorenzatto, Chief Production Development Officer; as well as other Company's executives.

The presentation will be available on our website, and now we will start with Petrobras' CEO, Roberto. Please, you may begin.

Roberto Castello Branco:

Thank you, Carla. It is a pleasure to be here with you to exchange some ideas and to disclose some information about the Company.

The world is dealing with twin shocks. On the one hand, we have the worst public health crisis since the Spanish flu, 100 years ago, and a very-severe recession, very-severe and synchronized recession. All lives and livelihoods are at risk.

At Petrobras, our number one priority is health: health of our employees and health of our Company. To deal with the health threats, we launched several measures to protect our employees, including a massive testing. Up to today, we have tested 22.5% of all employees and using home offices, reducing personnel operations at an average level of 50% of the total labor force at operations.

In order to deal with the threats to our health, we are preserving our liquidity, have withdrawn, revolving credit facilities, and increased our total cash holdings up to US$15.7 billion. We cut capital expenses by almost 30%, US$3.5 billion, and are pursuing a minimum reduction of our operating costs of US$2 billion. We are developing several initiatives to do that.

We organized under a liquidity committee that interacts with all of operation areas of the Company. They are the sentinels of our resilience and recovery, because we are now dealing with not only the short-term but accelerating the execution of the strategy that

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was put in place back in January 2019 in order to emerge from this severe crisis as a stronger Company, able to generate a lot of value to shareholders.

I said that we are executing several deep cuts in capital expenditure and operating costs, but we are doing this given the preservation of the safety of the Company and our commitment to sustainability.

Petrobras is executing its good corporate citizenship, helping the Brazilian society to cope with the threats arising from the COVID-19 virus. We have donated PCR tests, 3 million liters of fuels and several other medical and materials to public hospitals. We are helping with our scientists and our high-power computers to develop research related to the COVID-19 problem.

As I said, this such execution has been accelerated. Our commitment to maximize value through the increase in return of capital employed and reduction of cost of capital remains in place. We are pursuing a full review of our product portfolio. The competition for capital was enhanced in order to have a stronger capital discipline in a scenario of lower price of oil as we are seeing in the future.

We believe that the recovery will be slow, and price will converge to a plateau of US$50 per barrel in the future. So, we have to enhance the capital discipline to allocate capital on the most efficient way. Results will be shown later.

Our divestment program remains intact, business as usual. Of course, we may have some delays in the execution. But, the main block of assets, the refineries, the process is going ahead with some delay, of course.

But we do expect that by year-end, we have signed sales and purchase agreements with several players. Different from 2008 when we had global financial crisis, now we have a global economic crisis. The central banks reacted very fast to inject liquidity in the market. So, liquidity is not a problem, which facilitates the divestment program.

Well, having said that, I will say that we are confident that with the help of our professionals, highly committed with the Company when we need, and high-skilled people combined with world-class assets, we will survive to this crisis. And after that, we will be even stronger than we are now. We are very quickly learning the lessons offered by the crisis, and these will be applied for sure in the benefit of lower cost and higher efficiency and productivity.

Now, I pass to Carla to manage the conference.

Frank McGann, Bank of America (via webcast):

In refining, are there any issues with the mixed products being produced with demand and some remaining strong, and for this week? How do you adjust the production late?

The second question is, what is the current expectation for crude oil output over the next few months in the remainder of the year?

Anelise Lara:

Thank you, Frank, for the questions. You are right. We had some issues with the mix of products being produced in our refineries in order to meet the difference in the demand.

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That is why we did some adjustments in the operational side of the refineries, in order to deal with these issues.

Let me give you an example. For instance, in the FCC unit, we can adjust for a certain percentage of production between gasoline and LPG. In these last weeks, we had an increase in LPG demand and a decrease in gasoline. So, we adjusted FCC units in all refineries in order to meet this demand.

Another example concerns diesel and fuel with low sulfur content. Sometimes we can reduce the production of diesel and increase the production of bunker low sulfur oil. This is not an easy task to do, but we can manage some in the processing of the refineries in order to use different catalysts and other things in terms of temperature and pressure that we can deal with this difference in the mix of products during this crisis.

Carlos Alberto Pereira de Oliveira:

Regarding the expectations for crude oil output for this year, and also for the next month, what we have been seeing is that production for April that we have already realized, it is still in the same level of the 1Q, a little bit less than that because of the effects of the COVID-19, and also the effects of the reduction of the demand for oil. But the fact is that we have been having a very good operational efficiency.

And we have to consider that now we have reduced production due to the fact that we have the mothballing of the shallow water platforms. And also, we can have some effects regarding the people that we have on board, so that sometimes we have to reduce the efficiency of the platforms.

But the fact is that we are still maintaining the same goal, the same target that we have for the year, the 2.7 million barrels of oil equivalent per day, plus or minus 2.5%.

The current scenario is we have a lot of uncertainties. It is difficult to forecast what is going to happen. But, if we have the same partner and we have the same efficiency that we have been having so far, we are still keeping the same goal for the year.

Rodolfo Angele, JPMorgan (via webcast):

One of the key concerns in sector is related to the available spare capacity companies have. How is Petrobras' current spare capacity?

The second question is regarding Chinese (inaudible)recovery and relevant exports markets. We have been seeing some high frequency data pointing to recovery in fuel demand there, with utilization rates for teapot refiners also increasing. How does that reflect it on Chinese demand for your crude?

André Barreto Chiarini:

I will start, and then I will pass to Anelise to complement. Rodolfo, thank you for the question. I will start by exploring our overall storage capacity. In addition to available storage on our FPSOs, the storage on vessels performing our offloading operations, which are in transit, and I am not talking about any vessels hired by us just for floating storage. And also considering relevant storage capacity in our refinery, we also have various terminals of our subsidiary Transpetro covering the whole country, totaling a very relevant storage capacity of crude oil.

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The nominal capacity of crude oil in our system is over 15 million m³. Also, for storage capacity of fuel, we are talking about 4.7 million cubic meters.

Currently, inventory levels of both, oil and fuels are under control, and we have enough spare capacity. Over the recent weeks, we have managed to reduce inventory levels of gasoline, which are currently within the range considered ideal for us.

With regards to crude oil inventories, we are operating within their ideal range, and we are also monitoring both the adequate load of refineries and also the export volumes to operate at the lower level of such ideal range by the end of June. We have recently revised down what historically were our ideal levels of crude oil inventories, so that we can generate even more cash during this crisis. We are pretty confident that if necessary, we will have the logistics boarding capacity to set even higher records in crude oil exports, at least 10% increase over the 1 million barrels per day record set in April.

Our commercial team has been developing a long-term relationship with Shandong refineries in China, where our oil has strong demand even during the crisis, because crude oils from the Lula, Iracema, Sapinhoa and Buzios fields have the same overall characteristics of specific Chinese oils Shengli, (inaudible)that are experiencing decline in production.

As we are starting to see a slow recovery in our domestic market and as we have been able to adjust the fleet and product mix of our refineries to increase production of diesel fuel oil and bunker oil, we are most probably going to have increased export volumes of those higher value-added products, thus reducing oil exports, not due to demand constraints, nor logistics constraints, but to generate higher margins.

Having said that, we are not foreseeing oil production cuts due to the demand constraints in the short term, and we are not facing any problems related to storage capacity in the near term.

I will pass to Anelise to follow on.

Anelise Lara:

Just a quick remark on what André said, that we do not see any issue regarding the demand of our crude oil, especially in China nowadays. If we have more oil to export, we will be able to find market for that.

The main issue is the economics. Of course, we prefer to process this oil here in Brazil and to sell in our domestic market because of the higher margins. But what we see now is that the demand of fuel in China is ramping up very-fast and they are eager to buy more oil from us.

Bruno Montanari, Morgan Stanley (via webcast):

As we are now some two months into the crisis, can you comment on key lessons learned, and how those might contribute to Petrobras emerging from this situation even stronger? Has the crisis somehow accelerated any measures that were considered to be implemented to make the Company more efficient?

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And the second question, as the Company materially increases exports in an oversupplied oil market with higher transportation costs, how does the netback of exports compare with the netback of sales on a domestic market for refineries?

Roberto Castello Branco:

I will respond to the first question. Thank you, Bruno, for the question. First of all, we learned the most obvious lessons. We will be able in the future to reduce travel expense. No need for many travels.

Home office is being very successful. We have adopted very well to home office. So, in the post-COVID-19 period, we see that very feasible to walk away, 50% of our personnel in corporate activities in home office. That would save costs. We will be able to leave several buildings. And this will provide us with significant savings.

We learned also that home office has been very productive. We have worked very intensively in home office. And other lesson already learned during the crisis is that teamwork was reinforced with an integration of corporate and business areas, has been great. So, several ideas have been raised to cut costs, to increase efficiency. This integration has been highly productive to us. This is the lesson learned.

Another lesson was shown in the increase of exports, in the month of particularly in April, where we reached an all-time high level for export of crude oil. This was feasible due to the stronger integration between logistics and marketing.

And we are acquiring much more flexibility with domestic market and international markets. This includes not only logistics and marketing but refining and oil production. The integration of these added much more efficiency. And we are able to discover new horizons in our ability to market and sell oil and fuels.

This is a shortlist at the moment, but I do believe it has a high potential to contribute to value-generation over time. Every crisis has two sides, a negative one and a positive one. We think that we are enjoying good lessons and extracting significant benefits from the positive side of the crisis.

Anelise Lara:

Bruno, just a quick comment on your question about the netbacks of exports compared with the netbacks of sales to our domestic refineries. Of course, the netbacks of our domestic sales are higher than the netbacks of our export. But it has been like that since 2016, when Petrobras has a strategy to have this import parity prices for gasoline and diesel. It is important pillar of our strategy to keep our Company healthy. And keeping that, having import party prices for our products in Brazil, we have a better netback for netback margins.

This is also done even in this crisis when the import parity prices decreased. Some people, they did not believe that we would follow this reduction in price, but we did. In the 1Q, you see a reduction in gasoline and in diesel in Brazil around 50%, not all this price went to our vendors or gasoline offices, but from Petrobras refineries, we achieved did a great reduction both in gasoline and diesel following the parity import price.

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Luiz Carvalho, UBS (via webcast):

Oil dropped almost 70% in low, and Petrobras was able to pass through refineries close to 50%. However, pump prices dropped only 10%. In addition, foreign exchange rates depreciated significantly recently. The question is, how much of a challenge will be to follow oil prices rebound and foreign exchange valuation?

Roberto Castello Branco:

Luiz, it is a frequent question. One of the most frequently asked questions. And the experience is telling investors and analysts that we are following international price. We have no problem in following them.

Of course, we are an oil producer, we are not an oil trading company. If we follow international price, at every moment, we have to put someone in front of a Bloomberg screen and adjusting price instantly. There is no purpose in doing that. Our pricing policy is to adjust to international price after the observation of the trend. It is much more than just having a clock to adjust every minute.

Just an explanation: we are not driven only by oil price, we are driven by fuel price, because we carry crack spread. It may be highly positive in some cases, it may be negative. So, in the downward trend, we tend to have price higher than the international price during some days. In an upward trend, it is the contrary.

We tend to have our price lower than international price during some days. But we follow them. You will see an upward trend in gasoline price taking place since April 22, and we have made two price increases, one of 12% and other one of 10%. If we think that is needed another price increase, of course, we will go ahead. There is no problem at all.

Pedro Medeiros, Citi (via webcast):

Can you give more color on costs and expenses savings expectations for 2020?

Petrobras has been successfully narrowing the selling discounts of oil exports relatively to the Brent in the last quarters. Can you discuss how the selling spread of Brazil oil exports behaved relatively to the Brent throughout the 2Q?

Andrea Almeida:

Pedro, thanks for the question. We announced additional US$2 billion reduction in operating expenses. And definitely, this is not everything that we are doing, but this is what we, up to now, are able to announce.

Definitely, there are included many items. I think, the mothballing of the drilling rigs, the negotiation in contracts that we are postponing some payments. We started this discussion first in the postponement of payments, and now, we are going to get back to the table, and even connect it to the review of the portfolio.

Again, always important to mention, we are going to focus on the big suppliers. But after the review of the overall portfolio, we might find other and additional cost reductions related to some of our contracts.

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We continue to try to find cost (inaudible)have been talking about the adjustments of our health system, we are talking about adjustment to our overall structure to reduce cost related to personnel. We will be doing additional items, but up to now, we have the overall embedded into that additional US$2 billion that we announced.

Anelise Lara:

Concerning the second question, Pedro, you are right, we are selling our oil relatively to Brent in a good margin in the next quarters, but this margin has been reduced in the 1Q, lower than in the 4Q19, because of the volatility of the oil price in the market.

It also affects the premium of our oil, and the surplus of oil in the market is also an issue. So, in my opinion, in the 2Q you will see the same behavior, high volatility of oil prices impacting our margins in terms of oil, but still keeping a positive margin, especially because of the quality of our oil.

Petrobras:

Just a little remark from what Andrea said, that our CAPEX cut that we announced for 2020 will not affect the startup of the production system in the short-term production, just to emphasize that.

Christian Audi, Santander (via webcast):

You had originally planned to reduce production by 200,000 barrels a day. But given the rise in export demand, should we understand that the original 200,000 cut will no longer be needed?

Could you please comment on the hedge accounting for the exports contracted from April to December? What level of exports are already contracted for this period and what products are involved?

André Barreto Chiarini:

Thank you. We do not expect to have further cuts due to demand constraints in the production of oil. We are experiencing a very volatile and complex market dynamic these days. Our team is continuously monitoring and reassessing production levels, domestic sales in order to define export targets. That can vary over time, but we are not foreseeing, as I said before, oil production cuts due to demand constraints in the short term.

Andrea Almeida:

Talking about the hedge accounting, we had an impact on the results as well, together with the impairments related to the hedge account. So, what happened, to explain in small words: we do have a hedge accounting considering the exports we have for the future, being a hedge to our debt in USD.

Whenever we have a deep reduction in the price, like we had right now, what is going to happen? The forecast of the value of our exports for the future is going to be reduced. So, we will have last export in value to be protecting the debt in USD. That is exactly what happens.

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So, what we use to forecast the exports is definitely we have to prove, or we have to use the past experience to show that we will have volumes, and the price, we have to adjust together with the price that we adjusted for the overall portfolio.

We expect the exports to continue to be the way we have seen. Again, as China has been an important place, and we see China coming back, we saw higher exports as we release to the market, and we expect to continue to have that, but it is not just these that we are forecasting for the hedge accounting. We have to prove looking to the past.

André Hachem, Itaú (via webcast):

In the last crisis, Petrobras took the opportunity to review several contracts. However, when looking at the current status of suppliers in the industry today, as an example, the rig services, many of them have not yet recovered from last crisis. In this regard, is there still room for further contract revision? Is there anything that can be done in regard to FPSO leases?

Rudimar Lorenzatto:

André, Petrobras procurement area, with the technical areas are, at the moment, under a negotiation or renegotiations with the suppliers, and we have made progress in some areas.

So far, we have made renegotiations movement, aiming to adjust the cash flow for 2020. And we are now planning new wave for renegotiation to adapt the current contracts to the new market reality. Rigs and leased FPSOs are strategic services and we are studying in the detail to define some new objectives and negotiation strategies.

Bruno Amorim, Goldman Sachs:

What is the current level of utilization of Petrobras storage facility, both oil and fuel? Is utilization still going up, or has it started to fall, given the recent pickup in demand and oil prices?

Given the strong depreciation of the BRL, can you please remind us the impact of the 10% depreciation of BRL on your upstream EBITDA per barrel in the U.S. terms, all else equal?

André Barreto Chiarini:

As I mentioned before, inventory levels of both oil and fuels are under control. And as we have enough spare space, and we have been adjusting the production, and also adjusting the feed of the refineries to adequately meet the demands of the internal market and exports, we do not see any problems regarding storage in the near term.

In fact, the inventory levels are going down. Gasoline inventory levels have been going down over the last weeks. And oil inventory levels are also going down, especially by the end of June, but they are perfectly under control, there are no concerns about that at the moment.

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Andrea Almeida:

Following up to the question on the impact of the Real-USD on our EBITDA. I have the number for the Petrobras (inaudible). And after the adjustments we made, we have, for instance, a change in a Real-USD. We have around US$200 million positive impact on

EBITDA.

So, we see that the further depreciation of the Real that we observe right now is going to further increase, or improve our results in Petrobras.

Lilyanna Yang, HSBC:

Please, give us some color on demand for fuel, gasoline, diesel in April and May. Is demand in Brazil recovering fast? Any estimates for the 2Q, 3Q and 4Q in terms of demand?

Anelise Lara:

Lilyanna, in terms of demand for fuels, what we are seeing so far is that we had a huge impact in the first weeks of April that we got a reduction on diesel around 50%, in gasoline, 65%, in jet fuel, 90%. And even during April, and now in May, we are seeing a recovery, especially in gasoline, but diesel is also getting better, and other products also.

Our main concern is jet fuel. We do not believe that jet fuel could be recoverable soon, because of the international flights all over the world; it is not only in Brazil. This will probably affect the demand of jet fuel the whole year.

But, diesel, gasoline, bunker, naphtha, and other oil products, we are seeing almost a complete recovery in the 3Q and 4Q.

Vicente Falanga, Bradesco:

How are the conversations with local groups about the sale of refinery going? With the exchange rates at R$6, does this impact the transactions?

Anelise Lara:

We are talking with different players that are interested in our refinery. It is not only local players, but also international ones. As I said, we see that the interest is continuing, so, we do not see any of the players saying that they will give up. It is a good sign.

What we see is that we have to postpone the binding offers because of the crisis, and we hope that by the 3Q or 4Q of this year, we could have the binding offers already presented, so we can go on with the negotiations with the first player and sign the contracts in the 1Q21.

Barbara Halberstad, JPMorgan:

What is the plan regarding the debt level? Any liability management plans for the year? Is there any risk of covenant breaches?

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Andrea Almeida:

Thanks for the question. Regarding the debt level, our goal for the year is to end the year with US$87 billion of total debt. If we can do better, definitely, we will look and try to do better, but that is the goal for the year. And in the medium and the long-term, we keep the US$60 billion. That is the debt we believe is the one that Petrobras should have to be prepared for the volatility on any scenario, including the one we are just experiencing right now.

Regarding liability management, we will look for opportunities, this is always. Now, we are focused on liquidity, but if there is opportunity in the market to extend the term of the debt and roll some of the debt that we just got, definitely we will take the opportunity.

And the last point was?

Carla Albano:

Regarding covenants.

Andrea Almeida:

The covenants, we just have the debt with BNDES with financial covenant. There is net debt to EBITDA 5.5x. We do not believe we are going to get there, but we have all the documents ready even to ask for waiver, if necessary.

Carla Albano:

Thank you, all. At this time, our Q&A session is over. If you have any further questions, please send us an email to our Investor Relations team. And now, Roberto will make his final remarks. Please, Roberto, go ahead.

Roberto Castello Branco:

Thank you, Carla. I would like to thank you for your interest and attention to our video conference. As I said before, we are very confident on the survival and emergency of Petrobras as a stronger company.

During a crisis, courage and optimism are key. We have, as our main allies in this process, highly committed and highly skilled people. With this, combined with the world class assets we have, I am sure that Petrobras will continue to generate a lot of value to shareholders.

Thank you, and I expect to see you soon, in another opportunity.

Carla Albano:

Thank you. Ladies and gentlemen, the audio of this webcast will be available at Petrobras website. Thank you very much for your interest, and have a great day.

Roberto Castello Branco:

Stay safe.

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