Petróleo Brasileiro S A Petrobras : Petrobras Day 2020 - (Transcription)

Petrobras Day 2020

December 1, 2020

Carla Albano:

Good morning. Welcome to Petrobras Day 2020. Today, we will have the opportunity to discuss with our management our new business plan for 2020 to 2025.

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

This year, we are also broadcasting the Petrobras Day via LinkedIn, bringing more transparency to our strategic plan.

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 Trading and Logistics Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Nicolas Simóne, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations and Sustainability Officer; and Rudimar Lorenzato, Chief Production Development Officer.

The presentation will be available throughout the event on our Company's website. We will start by listening to Petrobras' CEO, Roberto Castello Branco. Roberto, you may begin.

Roberto Castello Branco:

Thank you, Carla. Good morning. It is a pleasure to be here to talk with you about Petrobras and its strategic plan for the next five years.

Individuals, as well as companies, should have a purpose, and ours is to be the best oil and gas company in shareholder value creation, with respect to people, the environment, and a strong focus on operational safety.

It is a nice statement, but what are we doing to reach that? First of all, we are promoting a transformational agenda at Petrobras. This is driven by a strategy that is composed by five pillars.

First, maximization of return on capital employed. This by itself is based on two important concepts: first, to be the natural owner. In other words, we will own assets in which we are the best to extract returns. This drives a large divestment program of noncore assets.

The second important concept is capital scarcity. Capital is scarce. We are in a very capital-intense industry, so it must have competition for funds. Projects have to compete among them in order to obtain funding to be implemented. This is very important as a

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discipline in capital allocation and value generation. We have a strong preference for value over volume. Our goal is to maximize value and not to maximize volume.

Another important pillar is reduction of cost of capital. As I said, we are in a highly capital- intense industry, so the cost of capital has to be low, has to be cheap. In order to achieve that, we are deleveraging our balance sheet. We are not happy with the size of our debt, but we have made many progress over the last couple of years, and since 2015 to the end of 2019, Petrobras paid US$70 billion of debt, with interest payments of US$37 billion.

Second point is transparency. Transparency and a strong communication with the financial community, and liability management in order to have lower costs of debt and to extend the maturity of debt in order to minimize refinancing risks.

Relentless search for low costs is also a pillar. We are a player in the commodity business. Commodities are exposed to volatile prices, and price volatility transmits volatility to our cash flow. So we must have low costs, and we are pursuing this relentless.

Seeing the long term, we have a scenario of low oil price. In order to survive and thrive in this scenario, oil producers have to be low cost producers.

Another important pillar is meritocracy. It is the basis for the creation of a value culture. A variable compensation program based on good metrics, we are using EVA, which was introduced in the Company last year and it is generating very good results.

And last but not least, an important pillar is the drive towards safety, health, respect for people and the environment. And the environment we have, as I am going to show you, we have a strategy for ESG in order to address the various problems related to climate change, to social inequality and so forth.

In order to execute this strategy, we have two important initiatives, two transformation initiatives: a cultural transformation, and a digital transformation.

Cultural transformation is very important. One may have the best strategy in the world, but if the culture rejects it, you are going nowhere. So culture transformation is very important, as well as digital transformation.

And to implement digital transformation, you have to change the mindset of people. But it is not enough to just introduce artificial intelligence, analytics, machine learning and other products of the digital revolution. We have to change the mindset of people.

And digital transformation is very important for our future as a low cost producer, as a very efficient producer, and important as well for the environment, for environmental protection, for lower carbon emission, for safety of our operations and our employees.

Moving ahead, again, in order to execute this this plan, we have a management model that is based on several points. First, courage, transparency and integrity. I think these are the necessary conditions for being a good leader.

Broad and efficient communication, external and internal communication. Cultural transformation is key. Transparent communication, frequent communication, and to say the truth in order to gain credibility.

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Strategic consistency. Strategy execution requires strong discipline. You have to be consistent all the way.

And the creation of agile teams, very efficient, able to interact. We have these agile teams composed by both corporate people and operations people, and they are able to discuss, to learn from each other and to make decisions faster than in the absence of this. Efficiency in all activities and that data driven decisions. This is key.

As part of the management model, we have freedom with responsibility. So accountability is our main marks of the management model. Meritocracy, trust within our organization, plus us among the members, is fundamental. If there is no trust, you are going to fail.

And succession planning and talent density. Petrobras is a nest of talents, we have highly skilled people. And our goal is to identify young talents in order to prepare them, mentoring these people to be the leaders of the future.

Moving ahead, as is widely known, this year we have the unprecedented case of a major health crisis and a global recession that was creating a negative shock on the oil industry across the globe.

Of our first reaction, we had to move fast, as in a war, once you are attacked, to prioritize health. The health of our employees and the financial health of the Company.

We organized teams to work on health safety, fighting the effects of the covid-19; home office, creating a more flexible model of working with the adoption of home office. Home office is scheduled to last until to the end of March next year, and after that we will move to partial home office permanently. This is very important, as not only protects the health of employees, but it is very beneficial from the economic point of view.

We are liberating about nine administrative buildings until the 1Q21, some are already going, and creating smart offices.

Alongside home office, we have adopted massive testing. Until now, we have applied more than 350,000 tests in our employees and employees from service companies hired to work for Petrobras.

And cooperation with society. We understand the human factor is important, and we should have compassion for the low income people to try to minimize the suffering.

Financial resiliency. As I said, we move very fast in terms of guaranteeing that Petrobras will survive the crisis, and within this, we faced all this uncertain environment, gave a fast response, but it is not only a matter of get through it.

As Albert Einstein, the world famous physicist and Nobel laureate said, "in the midst of every crisis lies a great opportunity". And we took the opportunity to accelerate the execution of our strategy, and, at the same time, to accelerate digital transformation.

This was very important for the future, and we are very conscious that it is not only a 100m sprint. We are running a marathon. And the 100m sprint fighting against the crisis reenergized the Company and created momentum to accelerate the strategy execution and digital transformation.

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Petrobras was the only company amongst major listed oil companies, to reduce debt in the 9M20. We have reduced US$7.5 billion in debt. Among the pandemic, we were able to do that. And Petrobras was also the Company with the strongest cash flow among large, listed oil companies.

Production growth in the 9M went very well. The pre-salt increased output by 32%. We are launching, as part of the program of lower carbon emission, cleaner and higher value added fuels. We made significant advances in logistics and sales and marketing of oil and fuels, not only in Brazil, but on a global scale. So we reached export records in oil and fuel oil with low sulfur content, which is more friendly to the environment than the old fuel oil.

And given our financial performance, the market improved the risk perception about Petrobras. We issued ten-year bonds with the lowest yield in our history, a really landmark. A major achievement.

To finalize my presentation, I will give you some top goals for next year. First, this year we have an index of greenhouse gas emission intensity as an element for variable compensation of our executives. We have goals for the oil business and for refining business, as well as we have a spilled volume that is very important to control to avoid environmental damage.

Gross debt, we have a target for US$67 billion. Delta EVA, the increase in EVA is projected to increase by US$1.6 billion, and the total recordable injuries rate per million of man/hour we put a ceiling on 0.7. Last year, we were benchmark in the oil industry in terms of injuries, in terms of safety of our operations, and this year we continue to perform very well, and we will continue to pursue ambitious targets.

And our main ambition in this area of spilled volume is to reach at any point zero fatalities in our operations and zero leakage of oil and fuels.

Having said that, now we are going to present an institutional video.

Video:

It looks like fiction. If we tell, maybe no one will believe us. It is already hard enough to imagine how is it possible to extract oil from the deepest reaches in the middle of a vast ocean. It seems impossible, but it is what Petrobras does. It is our daily life. All of this because we have a very powerful source of energy: knowledge.

Driven by this force, we discovered pre-salt. We are continuously breaking record after record, generating maximum value and focusing on the business we do best.

No wonder we are world leaders in ultradeep waters. This inventive energy is not only in our new technology, it is a new way of creating projects, making choices, reaching results, acting responsibly.

The choices we make today guarantee our future. The challenges are many. But we are not intimidated. We are driven by transformation, and we are launching new strategic programs, which will guide our operation until 2030.

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They are innovative solutions, which will turn projects into results. The unreachable into achievements, and the impossible into amazing. Come with us to know more and to make history. We are energy for transformation.

Roberto Castello Branco:

Innovation is something that is embedded in our DNA, and we are making all efforts to extract the potential that we have.

Now I will pass to my colleague, Roberto Ardenghy, to say some words about ESG.

Roberto Ardenghy:

Thank you, Roberto. Good morning, everybody. You heard Roberto. And I think it is very clear that when see Petrobras today, ESG and sustainability are becoming even more relevant and prominent for Petrobras, and an important part of our business plan.

We are maintaining our focus on the maximization of returns to investors. These are low- cost and efficient operations, but with very great focus on ESG and low emission. When we talk about governance and management quality, I think it is worth mentioning that two out of four metrics we have for the whole company are ESG-related and they will affect all employee compensation in 2021.

This has already started some years ago, and we are emphasizing this even more, putting these metrics as part of the compensation package, intensity of greenhouse gas emissions and liquid volume of oil and oil products.

The establishment of a Climate Change Executive Management inside Petrobras and connecting this Executive Management to a Board-level member also shows that climate change and emissions are receiving a high priority in our agenda.

Going to the next slide, when we see our path in the future, we see three basic pillars. The first one is transparency. What do we mean? We want to make sure that we quantify the carbon in all our critical processes. The second one has already been mentioned by Roberto, the resilience of the position fossils in view of the low carbon transition.

The third one is more related to technology, creation and skills to create value in low carbon. All of those pillars put us in what we call a double resilience. In one side, of course, being able to have a very good and very low break-even, in the economic area, but also make sure this break-even is also connected to our environmental low carbon agenda.

The next slide shows how we are going to do that. We see many possibilities in terms of innovation in our operations, biorefining. My colleague Anelise Lara and Nicolás Simone will be able to go further on those two points.

Also developing competencies, developing skills for the future. We are planning to invest, over the next five years, US$ 1 billion dollars in these areas. The next light shows you our commitments in terms of sustainability.

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We have not just commitments related directly to environmental and low emission targets, but also commitments related to investments in social and environmental projects, in biodiversity. We have been developing, in Brazil, many, many projects all over the country to support especially areas in which we operate.

These are part of our commitment to society and to the social park in Brazil.

Next slide. Here you can see that Petrobras has a target to remain in the first quartile of low CO2 emissions in the future. We are pursuing these targets to 2030 and we are planning a 25% drop in total emissions.

In the exploration and production area, we are targeting a 32% reduction, in carbon intensity; and, in refining, we are targeting a 30% reduction by 2030. Those are our targets, and we are going to be very focused on these objectives.

The next slide is also very important, more related to our social responsibility area. We are working very hard in terms of training our employees in human rights. We want to promote diversity and we want also to have a good diagnosis of the social and economic communities in which we operate.

One project that we are developing is a program that comprises many of the social projects we have over the country. It is very focus on Early Childhood Initiative. We want to make sure that we are able to invest in the improvement of the knowledge process of early children.

This is very important to support children in terms of education, so they do not present gaps in the process in the future in terms of knowledge. All the problems in the social area, which we are developing, we are trying to give to these programs education, early childhood education focus.

Finally, I want also to stress the governance area of Petrobras. The good practice of a co-operative governance, which is part of our decision-making process, they represent a very strong pillar to sustain our business. Through the continuous effort we are doing, we have been able to implement a very strong governance program and very effective, very ethical and very transparent.

We have done this through a new Code of Ethical Conduct. We want also to communicate to our supply chain these principles, not just a principle inside Petrobras, but to communicate these principles and conducts to the whole chain of suppliers.

In addition, we are very happy that we have been able, after six years, to return to the World Economic Forum initiative, Partnering Against Corruption Initiative. This is one of the main organizations in the world to fight corruption and brings together top-level people from companies and government. We are very happy that we have been able to return to this initiative recently.

Our commitments are developing a governance model today that is more balanced, in terms of efficiency and control, but we keep a very strong focus on integrity and transparency, zero tolerance to fraud and corruption. These are the messages that I want to convey to you. I will pass the floor to Andrea Almeida, our CFO.

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Andrea Almeida:

Hi, good morning and good afternoon, everybody. Very happy to be with you again. I will try to cover a little bit of our financial strategy. If we start with our financial strategy, it keeps focused on four main pillars.

First one, the reduction of debt and the associated cost of capital. So this has been our focus for a while. If we look back in 2015, Petrobras shared just a small part of its value with its shareholders, 80% of Petrobras value belonged to financial creditors, related to the net debt. The shareholders held only 20% of the Company's value.

Today, that has already changed. In this regard, since 2018, we have already reduced gross debt by US$4 billion. This seems small, but we need to remember that, in 2019, we added US$24 billion of debt due to IFRS 16, so we were able to reduce US$28 billion since then.

Only this year, even in a challenging scenario, we managed to reduce our debt by US$7.5 billion, reaching the value of US$ 80 billion in 3Q. As presented by Roberto, the 2021 target will be US$67 billion dollars, and 2022, US$ 60 billion.

In terms of liability management operations, we continue to focus on repaying the most expensive debt and increasing the average life of debt, avoiding strong concentration of amortizations.

This year, we did tender offer transactions and we repurchased bonds on the trade desk. In total until September, we made US$5.2 billion of bond repurchase, and we are right now in the market repurchasing bonds, executing the make-whole premium payment for US$ 2 billion of bonds.

In the active liability management, it is important to mention that we know that additional to that, we have several other obligations and contingencies that can affect our future. Therefore, the effective management of these obligations is very important. In this regard, we can highlight all the work that has been done together with Petros, our Pension Fund, where we implemented several improvements.

In June this year, we implemented the equalization plan to solve a deficit of approximately R$31.5 billion. We are now working to implement another defined contribution plan, PP-3, this year, for employees who have the desire to migrate their reserves to this plan.

With regard to the health plan, we made significant change with the implementation of an association. We expect a cost reduction of R$6.2 billion in present value over the next 10 years, due to better management and adjustments to the new regulation, CGPAR, where employees start to contribute with higher percentage to the plan, starting in 2021.

We are also working hard to reduce tax contingencies and, in this sense, we highlight the following process: we reclassified R$2.3 billion to remote loss related to the collection of ICMS on the import of natural gas from Bolivia; we made relevant REFIS agreements with the States of Rio and Espírito Santo, where we reduced R$ 4 billion in contingencies, with the payment of approximately R$ 2 billion.

It is important to remember the gain as well on ICMS on PIS/COFINS, which allowed us the use of R$16 billion, which we intend to use up to 1H of next year. In terms of the maximization of shareholder return, Roberto has already covered for that, but this is

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totally linked with portfolio management. The divestments in lower-return assets and concentration on higher-return assets.

As you can see from last year to this year, we included new asset sales like Marlim, BR and some other assets. In the optimization of working capital, this year we started using some credit lines from banks to extend the payment term for customers, without any impact on Petrobras working capital.

This instrument was important to leverage sales in the domestic market, especially in the challenging scenario that we experience. Inventory management has been a relevant focus for the Company as well, and we are looking to work with optimized oil and oil products inventories. We are also working in procurement with a program called Mais Valor, which is the financial tool for suppliers, with lower costs, supporting our strategy to increase supplier payment terms.

Turning to the next slide, we try to give you here an overview of our cash flows over the next five years. Perhaps the most important point is to show the strong cash generation that the Company is planning for the next years, around US$115 billion to US$125 billion.

In divestments, we have arranged from US$ 25 billion to US$35 billion. The investment cash flow expected for the next five years is between US$40 billion to US$ 50 billion, and E&P exploration and production will remain the biggest share.

Dividend payments also show that our dividend policy designed last year tends to remunerate shareholders in a relevant way after reaching the goal of the gross debt of US$ 60 billion.

If we turn to the next slide, we show the range, we show the assets that are in the range we just presented. We had some assets that, in the last plan, we informed that we would add them to the plan. I already mentioned some of them, like Marlim, Albacora, BR, Braskem, between others, in line with our portfolio review.

In refining and natural gas, we have refineries, as widely disclosed to the market, and the gas assets associated with the TCC agreement with CADE.

If we turn to the next slide, we see the adjusted CAPEX from US$75 billion last year to US$55 billion, with US$38 billion in capital and US$17 billion in sustaining investments. E&P continues to be the biggest portion, representing 84% of the total.

The main difference is in the adjustments from US$ 64 billion last year to the US$55 billion in exploration and production were the devaluation of the real; the optimization of exploratory investment; keeping the commitments agreed already with ANP, our regulator; avoiding CAPEX associated with divestment and the revision of the investment portfolio.

If we look at our deleveraging in the next slide, as I mentioned initially, the focus on reducing leverage has been constant in this Company and we managed to reach US$8 billion in 3Q, well below the goal of US$87 billion for the year. We continue to repurchase that, as I mentioned.

We also see the results in the weighted average cost of debt, reaching 5.8% p.a. in the last quarter. In the last quarter as well, we can see a small increase, which was the result of the repayment of the committed credit facilities that had a lower average life and lower

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costs, but this is a very important insurance, which we wanted to keep alive, for any volatility that we might have in the future.

In this area, we can highlight the 10-year bond pricing at the lowest yield in the history of Petrobras, at 4.4%. This bond is already trading lower than that, at around 4% in the secondary market, showing a positive impact from the perception of our credit risk.

If we move to the next slide, we see the strong cash generation that we have experienced continues next year. We estimate the free cash flow breakeven at US$23/barrel. This cash flow breakeven considers cash flows generated from operations minus the CAPEX.

The cash breakeven that includes CAPEX, interest payments, leasing and principal payments to be able to keep our total debt stable 2020 until 2021, with a cash balance US$5.5 billion is the US$28/barrel. This is for the overall Company. It does not include dividend payments or cash flow from divestments.

In terms of cash flow sensibility, we give you a sense in the right side of the slide, but each R$0.50 in the FX devaluation generates an additional US$1.6 billion in cash flow, and every US$10/ barrel of Brent generates US$5.5 billion. Thus, a scenario Brent at 50, and FX at 5.4 would be generating cash in the order US$22.9 billion.

If I go to the next slide, we show a little bit what we have been doing in procurement, which was very important during the crisis that we just that we face this year. In procurement, we are focused on five strategic drivers and, among them, I will mention compliance, which is the first and maybe the most important one.

Efficient controls and well-defined procedures are extremely important in the supply process. This year, we launched the Guide to Ethical Conduct for Suppliers, which incorporates all the guidelines in the areas of compliance, health, safety, environment and social, placing Petrobras at the forefront of the best ESG practices worldwide. This document has been incorporated into our contracts.

In the early engagement, important to mention that we have been working with greater standardization of our contractual agreements and technical specifications, reducing the man-hours involved in the negotiations in the engineering area and in the legal area.

This standardization initiative also supports the Prod 1000 Project, one of the most important projects we have in Petrobras.

Volume synergy, we started to implement the procurement process from the point of view of total cost of ownership. In practice, this means that we evaluate the contracts looking at CAPEX investments with the OPEX overview involved in the long term as well.

For some items, like Christmas trees, we have changed the form of procurement of this item and included the maintenance service in the bidding process.

In terms of alignment of incentives, this is not new. We have been doing that for a while. We have bonus for suppliers depending on their performance. Deliveries ahead of time are awarded, and this is a very important fact, for example, in the chartering of vessels.

Working capital reduction, I already mentioned the Mais Valor program, which is the financing for suppliers, which will allow suppliers to get funding to anticipate their invoices using the cost of funding from Petrobras.

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Everything in this area is focused on generating more value for the Company, and none of this would be possible without digital transformation. As an example of this, we will be implementing Ariba, an SAP tool that will help us speed up processes and ensure even more compliance. I would like to thank you all. Those were the messages for today and I will pass the floor to Capo.

Carlos Alberto Pereira de Oliveira:

Hi, good morning or good afternoon, everyone. I will start this presentation recalling our E&P strategies. I believe everyone has realized that we are increasingly focusing on deep and ultra-deep waters and that our growth strategy is based on world-class assets.

Our proposal is to move towards a portfolio that, in the five-year horizon, will lead us to lower production volumes after divestments have been made, but to a portfolio with greater value and greater resilience capacity to low oil prices.

Let us go to the next slide, please. With the with the prospect of a reduction in future oil prices, with consequent reduction in estimates of future operating generation, we reduced our investments of five years, making adjustments with a focus on maximizing value.

We are now projecting investments of forty US$46.5 billion in the period of 2021 to 2025, which represents almost 30% of reduction compared to the previous plan.

The real depreciation against the dollar contributed to this reduction, as well as the fact that we have added more assets to our divestment portfolio, avoiding the investments associated with them.

We also adjusted our investments in exploration and, finally, we optimized and postponed projects and canceled projects that, in the new reality of oil prices, are not attractive anymore. The result is a portfolio that concentrates investments in the pre-salt.

Next slide, please. As a result of our value maximization actions, we see on this slide a production curve that should be growing in volumetric terms without divestments, and a production curve after divestments, which is relatively stable until 2025.

This curve is sustained in a portfolio that generates more value and has greater resilience to low oil price. Looking at the year 2021, for example, we see a production of 2.75 million boed before divestments and 2.72 after divestments that are yet to take place this year and next year.

Looking now at the year 2025, we see a total production of 3.3 million before divestments, in a prediction of 2.7 million after divestments. This difference of 600 thousand barrels/day is due to divestments in onshore assets and in shallow water assets, in Albacora and Albacora Leste and in the Polo Marlim.

At the bottom of the slide, we see an increasing share of the pre-salt production, reaching 80% in 2025, compared to 67% of our total production in 2020. We do not see numbers after 2025 on the slide, but we could expect growth in production even with divestments, considering this plan, due to increased production in Búzios, where up to seven new systems are being planned or contracted to be added to the plan, starting at 2024.

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