Petróleo Brasileiro S A Petrobras : Transcription 2Q20

Webcast - Second Quarter Results 2020

July 31, 2020

Carla Albano:

Good morning, ladies and gentlemen. Welcome to Petrobras Webcast with analysts and investors about the 2Q20 results.

We would 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 [e-mail].

Today we have with us Roberto Castello Branco, Petrobras' CEO; Andrea Almeida, Chief Financial and Investor Relations Officer; Anelise Lara, Chief Refining and Natural Gas Officer; André Chiarini, Chief Logistics Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Marcelo Zenkner, Chief Governance and Compliance Officer; Nicolás Simone, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations Officer; and Rudimar Lorenzatto, Chief Production Development Officer.

The presentation will be available on our website, and today we will start by listening to Petrobras' CEO, Roberto, with the main highlights of our results. Roberto, please go ahead.

Roberto Castello Branco

Thank you, Carla. Good day, everybody. It is a pleasure to talk to you. The current crisis contains ingredients of important events of the last century: the Spanish Flu in 1918 to 1920 and the Great Depression of 1929 to 1933.

Of course, both medical and economic sides are much better equipped to deal with this type of event. However, even with that, we had a powerful public health and economic shock suffered by the world.

Recessions typically affect more strongly investments in the manufacturing industry. This time, it is different. We face a nontraditional recession, as it has hit more severely consumption and service. And service includes transportation services, which is the main channel of the shock on the oil industry.

Last quarter was one of the most challenging, if not the most, for the global economy and the oil industry. Particularly April 2020 is a month to be always remembered in the history of our industry, given the unprecedented strength of demand contraction, price collapse, and a spike in maritime freight price.

Cash is always key, but now it became God. Over the last few months, it was God to us. We are very happy to say that there was no cash burn. On the contrary, we managed to reduce net debt, operational cash flow reached US$5.5 billion and free cash flow, US$3.4 billion.

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Given our liquidity position, we are able to start the prepayment of the revolving credit lines withdrawn in last March. It is an important move. It is the restart of our deleveraging process. It is a movement to cut interest costs, to improve risk perception, and, by the end of the day, the lines will remain available. So, we have liquidity at our disposal.

As in a war, the unprecedented scale and speed of the global pandemic compelled us to move swiftly. We are working hard, fast and focused to be a winner. Our goal is to engineer a J shaped recovery. We are acting not only to survive in this short term, but to promote the structural transformation in order to thrive and generate value over time.

The world was moving fast, but now it is moving even faster, inspiring creativity and innovation, and requiring stronger resilience.

We see the crisis as an inflection point from which we must accelerate the execution of our strategy to allow Petrobras to turn the page of a long history of value destruction. We had more than 10,000 employees enlisting for the voluntary dismissal program. Up to 2,900 already left the Company, 5,000 people will leave the Company between August and December this year, and the remaining 2,300 will leave next year.

In addition to that, 25% of the managerial positions were eliminated. We estimate the total savings can reach up to US$1 billion per year.

The Company is carrying out several other initiatives to diminish costs and to boost efficiency gains. Administrative buildings, which are now 17, will be reduced to eight until the 1Q21. There is a sharp reduction in the number of expatriates working at our offices outside Brazil. Several inefficiencies were already eliminated in the logistics business, and now, our focus there is on the optimization of inventories and the number of warehouses.

A wholly owned subsidiary, Transpetro, is also embarking in a program to slash costs and inefficiencies, and to pursue a dramatic increase improvement in service quality.

Digital transformation is key to our future as an agile and efficient company. It is running at fast pace in several corporate and business areas. Projects are addressing costs efficiency, greenhouse gas emissions and operation safety.

In order to support artificial intelligence, our high power computing capacity was multiplied by 7x in relation to what we had by the end of 2018.

Our main innovation projects, dedicated to lower breakeven price in the E&P business, are moving ahead. We have several of them: EXP-100,PROD-1000, HISEP, it is a very important project, PEP-70.

Recently, as we mentioned in our report, we have TOTUS, the True One Trip Ultra Slender technology, proved to be successful, reducing by 50% the cost of drilling and completing a well in the post-salt.

We took steps to order three new FPSOs, the first order of Petrobras in eight years. They will operate in the second stage of Búzios. In one of them, the Admiral Tamandaré, we have a capacity to process 225,000 barrels per day, which would be the largest oil platform in the Brazilian seas and one of the largest in the world.

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Our divestment program is well and alive, despite all the difficulties arising from the current global recession. In the year, it generated cash revenues of almost US$1 billion.

The sale of the RLAM, the Bahia refinery, is on track, and we expect to reach a final deal to sign a sales and purchase agreement in the near future, perhaps even during this quarter.

We still face tremendous challenges in our journey to sustainable value creation. There was some improvement in the macro scenario. The old economy seems to be reacting to the massive injection of cash by monetary and fiscal authorities, about US$15 trillion. Demand for fuel has improved, it allowed us to optimize the operation of the refineries. But we have to be very cautious, because if the uncertainty still remains, it is very risky to make projections for the near future.

We are pretty sure that higher price will not bail us out. We must rely on our own efforts, and we are doing our best to become a much better company, to reduce on a structural way our costs, to increase productivity growth and to deliver value to shareholders.

As I said, at Petrobras there is no room for pessimism. We strongly believe that with courage, moderate optimism and hard work we will win. We are engineering a J-shaped recovery and aiming to end much better than in the pre-COVID-19 period.

Thank you. I pass now to Carla Albano to conduct the meeting.

Frank McGann, Bank of America Merrill Lynch:

Capo, could you provide a bit more definition about expectations for output in the 2H20 and the timing and scale of maintenance? How could this affect overall operating efficiency and unit costs?

Carlos Alberto Pereira de Oliveira:

Hello, Frank. Thank you for those questions. The expectations are that we will have less production on the 2H than the production that we have been having so far, as we postponed the large stoppages that we were to do at the 1H, and now they are in the 2H20. Those stoppages will happen from September to November this year.

Regarding the timing and scale, it will be around eight stoppages of 15 days, more or less. They are big stoppages.

But one important thing to mention here is that we have already done some activities related to those stoppages, because we had some interruptions on the production of those platforms. So, we took advantage of those interruptions, and then we made some activities.

So today, 30% to 40% of the activity that we have predicted to do during those big stoppages, we have already done that on Búzios and other pre-salt platforms. And also, this explains the good performance that we have so far.

So, in terms of maintenance that we are predicting for this year, we think that the output for the 2H, as I mention, will be lower, but due to the fact that we are going to do the maintenance, the big stoppage, at the 2H.

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Frank McGann:

Can you give us some indications as to how the current review of the portfolio could lead to adjustments in the Company's strategy?

Roberto Castello Branco:

Thank you for your question, Frank. There will be no change in our strategy. The strategy remains intact. What we are doing is to enhance our criteria of project evaluation. We established as the baseline price for project evaluation, US$35 per barrel of oil.

For instance, Búzios, we announced the order to build three new FPOS, and, before that, we estimated the breakeven price. All of them, the three areas of Búzios, they are below US$35 per barrel. So they were approved, and we are taking steps to start the development.

What can change is some projects that are not as good being cancelled, or to be re- dimensioned, but there will be no change in our strategy. The five basic pillars continue intact, and we are just accelerating their implementation.

Christian Audi, Santander:

Could you give us some color on how you are seeing demand for oil exports, especially in Asia and Europe? Has the demand from China remained stable over the past weeks?

Anelise Lara:

Christian, what you have seen is that, after Western demand has collapsed for crude oil and oil products during part of the 2Q, we are seeing demand recovering for all Petrobras' crude oil exports market, including Asia and Europe.

You are right, over the past few weeks, China's market has suffered impact from fluids in the south of the country during July, affecting the demand, but we believe temporarily. And in general, it has experienced a consistent demand for crude oil exports from Petrobras. Our low sulfur crude oil is very well accepted worldwide.

Christian Audi:

Could you please share with us the latest developments regarding the sale of refineries? More specifically, has there been significant interest for all refineries at the price levels that you are aiming to sell them for?

Roberto Castello Branco:

We did not see any manifestation of lack of interest for our refineries. Of course, it is not running at the original pace that we planned, naturally, due to the global recession. The scenario changed, and some of the potential buyers asked for some time in order to get new approvals from the Board of Directors, others to restructure the arrangements with their financiers.

But, as we see today, there was no change. Interest is alive, we expect to conclude the signing of the sales and purchase agreement for RLAM in the next couple of months,

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and we are confident that, until the end of 2021, we will have the closings of all refineries for sale.

Vicente Falanga, Bradesco BBI:

How is the process of unitizing the offshore gas pipeline tariffs? Is the Company ready to IPO these assets in the 2H20?

Anelise Lara:

This offshore gas pipeline, as you know, is an integrated system, and it belongs to Petrobras and some pre-salt partners like Shell, Repsol and Petrogal. We are finalizing the document that consists of this integration system, the package of this integration system to be able to create this new company that will be dedicated to operating and build new offshore gas pipelines.

So, as I said, we are in the end of these negotiations with partners. We believe that, by the end of the 3Q, we will be ready to sign the documents. And then, the next step will be to create this company. I believe that the IPO of this company will stay for 2021.

Vicente Falanga:

The discount of Brent was quite elastic this quarter, around US$5 per barrel. Should we expect this to return to more normalized levels in the 3Q20, closer to US$1 per barrel?

Anelise Lara:

Yes, you are right. Discounts to Brent dated, which is the reference to the spot market, have increased due to the demand collapse during part of the 2Q, when only Chinese refiners were purchasing crude activity. For the moment, the buyer markets recovered in the other destinations and the discounts were significantly reduced, switching to premium.

On the other hand, what we saw in this quarter is that the shipping rates, the freight rates were very high at the beginning, especially in April and mid-May, but now they are back to normal levels, around US$2.5 to US$3 per barrel from Brazil to China.

Roberto Castello Branco:

It is important to add that our crude oil is traded at a premium to Brent. It is not as at discount to Brent, given the consolidation of its brand name in China, the preference of several Chinese private sector refineries.

Régis Cardoso, Credit Suisse:

Given the substantial gain on tax credits in 2Q20, about R$17 billion, what should we expect in terms of use of these credits? Does the presence on the current assets implies realizations within the next quarter of the year?

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Andrea Almeida:

Régis, thank you for your question. Actually, there is a process that we have to pass through, a habilitation process so that we can start using those credits. This habilitation process can take up to 90 days, so we expect that we will be using this credits for the next up to 24 months.

It will be hard to use everything this year, so we believe it is going to be up to 24 months. It will depend on how long it takes for us to be able to use the credit or this process that we have to pass. But that is it.

Lilyanna Yang, HSBC:

Anelise, Petrobras is working towards divestments in the gas, midstream and downstream, and bringing on more competition to the gas sector. Would you please comment on the positives and key challenges on the proposed gas law, which has been under discussion in the Congress for the past few years, but has not yet approved? Thank you.

Anelise Lara:

I will comment on that, and then I will pass to Roberto to add his comments. We are supporting this new gas law. We think that it is the possible arrangements that we could have here in Brazil regarding all the stakeholders. I am talking about gas producers, gas transportation companies, distribution companies, and commercialization companies. And the industry is very interested in the reduction of the gas price in the country.

So, when you see all these different players, this new gas law has lots of advantages because it addresses the main issues related to the opening of the market.

How are we going to give authorization for new gas pipelines, transportation? How will the free consumers in the industry have some rights to get the gas directed from the marketing, instead of having to pay the integrated distribution taxes? All these aspects will be important to make sure that the new gas market in Brazil will be opened, and could be a competitive and dynamic one. And by doing that, we also expect a price reduction in the gas market as a whole.

Roberto, if you want to comment.

Roberto Castello Branco:

I do agree with you, Anelise. I think that Brazil badly needs structural reforms, and this is one of the important reforms that is being launched. Open competition will benefit consumers, producers, and the Brazilian economy. To attract investments, what we want is competition.

We are performing our role, we are opening room for other parties to transport gas in the gas pipelines. We sold TAG, 100%. We are selling the remaining 10% of NTS. We are trying to sell TBG.

Unfortunately, the regulatory agency does not allow a more significant reduction in the price of transportation as we see, and this creates a cloud of uncertainty about the assets.

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We expect this to be solved. I expect that the regulatory agency understands the importance of this reform, the importance of Brazilians to have gas at a lower price, eliminating distortions that existed for a long time in the Brazilian market. We are very positive about that.

Thiago Duarte, BTG Pactual:

Andrea, considering the improvements in oil prices in the last 60 days, and considering the current future curve, as well as the potential of cash generation, when the Company believes it will be possible to reach the gross debt target level US$60 billion?

Andrea Almeida:

Thiago, thank you very much for your question. It is hard to say, because we still see a lot of volatility in the market, even though we know, at least we see right now the Brent price around US$40, so definitely better than what we saw in the last month, but it is hard, and we still need to finish the review of our portfolio.

What I can tell you is that it is going to be very hard to be in 2021 as we expected before. So we are working towards trying to make it in 2022, but still it will depend on the revision of the portfolio.

Thiago Duarte:

Once the price and demand scenario improves, does the resilient plan lose effect? Should we imagine that parts of the costs and investment postpones could be resumed?

Roberto Castello Branco:

There is a traditional crisis cycle. When there is a crisis, companies respond to the crisis, there is improvement, and in the later stage there will be complacency. We are not addressing the short-term only. We are addressing the long-term.

Our goal is to reduce our cost structures on a permanent basis. So, they are focused on that. For instance, even the voluntary dismissal program, its effects will be felt much more next year and further on, not this year. This year, on contrary, we are making provisions to make the severance payment and incentives to the employees that are leaving us.

And many other initiatives are addressing significant gains over time. The implementation of digital transformation, the innovations that are being developed, they will have effects from one year to five years ahead.

And there will be no complacency as price rise. Discipline is key. Discipline in capital allocation, discipline in cost management, and they are established on a permanent basis, not just because the oil price collapsed. We do not expect higher price to bail us out. We are fighting on our own.

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Bruno Montanari, Morgan Stanley:

The oil market condition stabilized faster than many market participants expected. With that in mind, should we expect to see Petrobras further repaying its revolving credit lines, and potentially resuming the liability management efforts with gross debt reduction?

Andrea Almeida:

Thank you, Bruno, for your question. We definitely want to reduce and to repay the committed bank lines until the end of the year, if everything continues like we see right now. Again, we do not know. We just know that the scenario can change. So if this does not change, we want to repay the committed bank facilities until the end of the year.

And in terms of gross debt reduction, as I mentioned, the goal is to finish the year at US$87 billion. And if the market allows us, we will always try to reduce it further. So liability management will come back, definitely. That is a goal.

As Roberto said, our pillars stayed the same, and the reduction of cost of capital is one very important pillar. So if we can reduce the total level of debt and reduce the cost of debt, that is the focus. That is what we are going to do.

André Hachem, Itaú:

The agreements over the TOR surplus volumes with the Chinese NOCs was expected to occur during the 2H20. Could there be any set back in that regards due to the crisis and travel restrictions?

Carlos Alberto Pereira de Oliveira:

No. Thank you for the question. We have all been facing some challenges due to the effects of the COVID-19. But so far, as I have mentioned, there is no change in our target to close the co-participation agreement until December 2020, as we have planned since the beginning. So things are going well.

Luiz Carvalho, UBS:

Andrea, can you share more thoughts on dividends for this year due to the impairments and visibility towards the 2H20?

Andrea Almeida:

Thank you for the question. Again, it is hard to know what the net income for the year will be. As you know, our dividend policy will trigger a higher dividend whenever we reach the US$60 billion gross debt.

Regarding the net income for the year, because of the impairment impact that we had in the 1Q, it will be very hard to imagine that we will overcome that and come back to positive. But if that happens, we will have more dividend. It is just hard to say right now. And just reaffirming that the trigger to higher dividends will be the US$60 billion gross debt.

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Luiz Carvalho:

Now that we are exiting the COVID crisis, what would be the ideal cash position for the Company? And also, any plans of potential debt buyback to reduce the financial costs even further?

Andrea Almeida:

Again, we do not want to keep the level of cash the way it is right now. If volatility goes down, the objective is to go back to the levels we had before the crisis, that was around

5.5. And if we have the levels of cash, that means, that we would have the committed bank facilities available again. So it is a combination of the cash level with the insurance available if anything happens. As you know, we can drawdown them again if needed, if any event happens.

So we do have goals to reduce the gross debt until the end of the year. We are at US$91 billion right now, and the goal is to end the year at US$87 billion. And if we have extra cash, if we have a less volatile market, we may be able to do even better than that. But it is hard to say right now.

And then, for sure, liability management programs will be there to reduce the cost of debt. I think that is the overall. And if everything goes even better than what we see right now, we might have better results, but it is hard to say at the middle of the year.

Bruno Amorim, Goldman Sachs:

Capo, can you please update us on the plan to curve declines in production in the Campos Basin? I want to know about CAPEX, recent achievements and plans for upcoming years.

Carlos Alberto Pereira de Oliveira:

As we are now facing some changes regarding the oil price, we still have in mind to return to the same levels of production that we had in 2019 in the Campos Basin of almost 1 million barrels per day of oil. But we will only do that if it really adds value to our portfolio.

So, due to the lower price of oil, so we are testing all the projects and checking if they are really resilient. And what I can anticipate is that the great majority of the projects is very resilient to lower oil price.

So the main aspect here is not the economics of those projects, in fact, but the financial aspect is what we have to check, our cash generation, and also the management of the debt that we are going to do, and we have to look at the whole portfolio of the Company.

Those are the things that we are checking right now. So economics, I think that it is good, but the financial perspective will take some a month or two months more to see the whole picture of the Company, as Andrea has already mentioned, and see what we are going to do with the speed and the velocity of the projects, the shape of the investments that we are going to have. And that includes the Campos Basin as well.

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Bruno Amorim:

How low can the pre-salt lifting costs go? Can FPSOs with capacity greater than 160,000 barrels per day drive even lower listing costs?

Carlos Alberto Pereira de Oliveira:

What we have been doing regarding the lifting costs is that we want to reduce them more. The effect when we add FPSOs with greater capacity, for sure, the expectation that we have is that we will have a lower lifting cost in the future.

And I think that, we are going to see also that when you look at the general picture, not only the pre-salt lifting costs, as we are taking out some production platforms that are old and replacing them by other platforms that are new, like in the Marlin Field, for instance, or when we are divesting on the fields that we have in the shallow waters, and also onshore.

So when we look at the whole picture, our expectation, and that is what we are doing, that is our job, is to reduce the lifting costs of the Company, for sure.

Rodolfo de Angele, JPMorgan:

China was a key-market during the quarter, and we are seeing some independent refineries operating at very strong utilization rates. How is Chinese demand for Petrobras' crude? What are Petrobras' expectations for Chinese demand growth in the 2H20?

Anelise Lara:

Rodolfo, what I can say is that Chinese appetite for our pre-salt crude is strong. As you know, they import a huge amount of crude oil, and we see that Chinese demand will continue to grow. So I am sure that, if you have more oil to sell, they will be a buying that.

Our question here is, what is the most valuable trade-off: produce oil products to sell in Brazil and even abroad, or export crude oil? We have these options. And our decision is always based on the economic side, which takes the best value for Petrobras. And we take this decision based on these economic parameters.

Rodolfo de Angele:

Andrea, can you comment on what to expect in terms of CAPEX, ballpark figures, for 2021 and the coming years? What will be the focus of the investment program?

Andrea Almeida:

Rodolfo, thank you for your question. I know there are lots of anxiety about the numbers for next year, but we still need to finish the portfolio review. But what I can confirm, and definitely, there will be some FX impacts as we mentioned before, because we do have 60% of CAPEX that are Real, so we might have impacts on FX if we compare to last year numbers, but what we can confirm is that the focus will continue to be on deep and ultra deepwater. They will continue to represent the biggest portion of our investment.

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And again, the focus will continue to be on world class assets that have a breakeven below US$35 per barrel as Roberto said.

So I think on that side, the strategy keeps the same, we will be focused on the higher return assets, and that is what you will see in the coming CAPEX announcements whenever we have the new numbers.

Carla Albano:

Thank you, Andrea. Thank you all. At this time, the Q&A session is over. If you have any further questions, you can send it to our Investor Relations team, and we will be glad to answer. Roberto will now make his final remarks. So, please, Roberto.

Roberto Castello Branco:

Thank you, Carla. I would like to thank you for your attention. It is our goal to maximize transparency and to improve our dialogue with the global financial community. And we keep making restless efforts to create sustainable value over time, it is our main commitment to you and to all Petrobras' employees and stakeholders, to create value on a sustainable basis with safety, respecting the environment, focusing also on ESG.

I look forward to meeting you, or even better, seeing you in person in the future. Have an excellent weekend, and stay safe and healthy.

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