Petróleo Brasileiro S.A. - Petrobras
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Good morning ladies and gentlemen. Welcome to Petrobras conference call with analysts and investors for the presentation concerning the First Quarter of 2017 results. We would like to inform you that participants will be listening to the conference only during the company's presentation, which will be conducted in Portuguese with simultaneous translation into English. Following the presentation, a Q&A session will begin in Portuguese and English, during which instructions on how to participate will be provided. If you need help during the call, please press star 0 to reach the operator. Today with us we have

[Isabela Carneiro da Rocha:]

Good afternoon everyone. I would like to thank you all for your presence and go into detail about the results of the first quarter of 17. The main highlights in the quarter on Slide number 3 are

[Operator:]

Now we will start the Q&A session. We would like to ask each participant to ask two questions maximum in a clear manner so that the executives may answer them. We would like to ask you not to use the speakerphone. Questions asked in English will be heard by all participants in the original language and answered by the executives in Portuguese with simultaneous translation into English. [Operator Instructions] Our first question comes from Rodolfo Angele, JPMorgan.

[Rodolfo Angele:]

Hello. I have two questions, first I would like to ask the management now that the company will have a few days to choose to participate or not in the pre-salt auctions -- I don't think that you can tell us everything that you are going to do, but -- I think that we would like to hear how are you seeing these options, how do you differentiate between the two pre-salt auctions? What can we expect in terms of strategy for us to see your decisions to bid or not in the upcoming auctions? That's my first question. My second question -- and I want to contextualize it , we have seen investors very concerned about crude oil prices, and of course we see that you are sparing no efforts to control your expenses, so what else is there in the pipeline? Can we expect more coming up? Isabela explained some effects that we can expect for the first quarters, but in terms of costs what else can we expect? Particularly because we see the company facing now a lower crude oil price.

[Ivan de Souza Monteiro:]

This is Ivan speaking Rodolfo, thank you for the question. I'm going to give the floor to Solange to answer your first question.

[Solange da Silva Guedes:]

This is Solange. Good morning Rodolfo. As we said yesterday in our press conference, Petrobras is following opportunities up-close, opportunities offered by the Brazilian Petroleum Agency ANP in the first two sharing rounds and the concession rounds, the so-called 14th round, that will take place soon. Petrobras intends to rebuild its exploration portfolio, and in that sense, we are following these projects with a lot of attention. Our strategy will become clearer as the auctions come up.

[Nelson Luis Costa Silva:]

Rodolfo, good morning. What we are seeing now, as you mentioned, are the first results of a project to reduce costs and to generate value through those four pillars of the plan

[Operator:]

Our next question comes from Felipe Gouveia with Bradesco.

[Felipe Gouveia:]

I would like to get an update in terms of drivers and the FPSO to reduce accidents because we saw that some accidents happened in recent months. I would like to know

[Ivan de Souza Monteiro:]

Felipe, I'm sorry to interrupt, but we could not understand your first question. The sound is muffled. Could you please repeat? Perhaps speak slowly and repeat the first question. And I am sorry to interrupt you.

[Felipe Gouveia:]

Better now Ivan?

[Ivan de Souza Monteiro:]

Yes, better. Thank you.

[Felipe Gouveia:]

My first question is related to accidents in the risers of the FPSO at Lula. Some accidents were reported to be linked to corrosion, and I would like to understand if this has been solved and whether this can happen in other units that deal with high CO² concentration oils? My second question has to do with the cutting down of costs. Could you give us more granularity regarding the factors leading to such a strong cost cut that we saw in the first quarter? And since Nelson is here, perhaps he could give us more color on the 0-base budget (ZBB). And another question if I may, regarding Capex, Capex annualized will be US$12.5 billion, way below the guidance for 2017, so could you please explain the reason leading to that? And the reason I ask is that another concern of investors is how sustainable is this low Capex vis-à-vis the impacts on production later on in the future more long-term.

[Ivan de Souza Monteiro:]

Thank you Felipe. The first and third questions Solange will answer and then the second question will be answered by Officer Nelson.

[Solange da Silva Guedes:]

Good morning Felipe, this is Solange speaking. I will try to answer your first question because I understood I guess part of the question that you asked it. It seems that you were referring to some events related to the risers in the pre-salt. What I can share with you is

[Solange da Silva Guedes:]

This is Nelson, Felipe. Giving more color in how we are operating, there was that first effort to have the scorecards, more than 7,000 scorecards and a lot of goals, sub goals so as to deliver our top metrics, reducing leverage and safety. But in addition to the 7,000 scorecards, I would like to remind you that every Petrobras employee is being managed with their own individual goals. We are very much focused on delivering our metrics and goals. How does this work? We have a leadership committee, and this committee and this committee meets weekly to see if we are deviating from our metrics the ones that I mentioned, and this committee works and acts whenever we find a deviation, and we have to find the root cause whenever possible we find a root cause. And then, at the level of the management, we have a directive committee with the participation of all the management officers, the members of the leadership committee and all the contribute first to understand the metrics, and ZBB. We are measuring performance always adjusted to the assumptions of the plan, so we remove exchange rate and other things that are out of our control so that we can have the right assessment, and then once every quarter we discuss this at the board level our quarterly results. So, as you can see, this is very thorough work with weekly control levels. Obviously, we have daily control at the operational level. So, this is very granular work involving from the board of directors every three months to the management once a month, the leadership committee and ZBB team weekly addition to the daily assessment that we do at the operational level. This is how we work.

[Felipe Gouveia:]

This is perfect, thank you. One follow-up question about ZBB. Is there any expectation then zero base budget will be 100% implemented, or it is implemented?

[Solange da Silva Guedes:]

Here we have the execution discipline, Felipe, the methodology is implemented, but over time we can refine it and this is the first quarter, as I said in the beginning, these are just the first steps of a very long journey and execution is the key of our success to deliver the plan. The cost reduction results of what we had in this quarter, unfortunately going a little beyond what we had expected in the plan, but it doesn't mean that we are not going to continue to do everything in our power to continue to capture cost reductions in the future.

[Operator:]

We would like to ask the participants to ask their questions slowly. Question coming from Christian Audi with Santander.

[Christian Audi:]

Good morning and congratulations Ivan on the results. I have two questions. The first is related to deleverage and sale of assets. Do you continue to deleverage the company even without selling assets I guess, right? So, my question is, could this lead to an adjustment of your goals to sell assets or not given that you are able to deleverage the company even without selling assets more recently? And do you expect to resume sale of assets more towards the second half of the year? My second question is related to production CapEx. It became clear on Slide 21 that you lowered the CapEx to this level of 17 billion and I would like to understand the reasons behind that and the impact of that not on 2017 production, but if it is a continuous CapEx reduction perhaps the impacts will be felt in 2018 production. Could Solange enlighten me please about that?

[Ivan de Souza Monteiro:]

Thank you Christian. No, there will be no changes. The last material fact about divestments, the company confirmed our goal of $21 billion, there was no change to that. And it's always important to mention the program in a context. It has a strategic context in our business and management plan. The company declared that it will prioritize investments in E&P and in the pre-salt, and in addition, the company in this material fact disclosure we mentioned some assets, Pasadena and some assets in Africa that the company will divest from. So, the fact that we had a better performance will not change the attitude of the company given our strategic decision or our go to deleverage. We have to reach the goal by December '18. If the company, as our CEO Pedro Parente mentioned, even if we reach that goal before hand, still we would be in an uncomfortable condition in terms of the goals to deleverage. So, we would definitely not stop this trajectory. This is the first landmark. Great, if we can bring thanks forward, great. But the company will not stop there because compared to the industry we still need to improve our metrics as you probably know. And as for your question about Capex, I will turn the floor to Officer Solange.

[Solange da Silva Guedes:]

Good morning Christian, thank you for the question and your comments. In answering a question prior to yours, I was explaining the events that led us to change our projection from US$20 to US$17 billion investment in 2017. I stress and I repeat that there is part of that coming from optimization and part of that coming from postponements, and these delays and postponements are not necessarily linked to production, but to disbursements and payments that Petrobras planned to do along 2017. But these payments will not be paid in 2017, and this is one of the reasons that led to this reduction. Of those events, for example, related to environmental licensing processes that made us stop allocating resources in payments because the licensing process is not complete, with possible impact on production, we are mitigating these impacts. In that sense, I stress that we maintain our production curve estimate for 2017. We do not envision any significant impact in our goals announced in the horizon our business and management plan.

[Ivan de Souza Monteiro:]

Christian, just to add to your question something I forgot before (this is Ivan speaking), regarding when we are going to have a return, the company has been working intensively since the decision by TCU (the Federal Auditing Court) we’ve been working. I don't know if you will remember, we decided to resume all projects and to apply our systematic approach to all of them. In the beginning, we have to identify the assets and we have to prepare assets, we had to identify the strategy together with the business area of the company in how to best present the strategy to the market. Then, we had to define the criteria, how to prepare the teasers and we are working intensively and expect that we can disclose information to the market in the first half of the year in terms of which assets will be part of our divestiture portfolio.

[Christian Audi:]

Okay, thank you very much.

[Ivan de Souza Monteiro:]

Thank you Christian.

[Operator:]

Our next question comes from André Natal, Credit Suisse.

[André Natal:]

Thank you very much for allowing these questions, and again I would like to join the others in congratulating you on very strong results. My first question is about the voluntary separation incentive program (PIDV). I'd like you to talk about the program because we started seeing people joining last year, but people are leaving the company little by little. You have provisioned most of the cost for this last year, and as I understood now there were some reversals of that. I understand that these are people who decided not to join of the program. So, I guess that the cost reduction coming from PIDV is coming little by little. So, could you please explain how many people left along the first quarter, how many people gave it up and how many people are expected to leave along the second quarter? How much of the intended cost reduction that you announced at the beginning of the program has materialized and to what extent this can materialize in the coming quarters? Because I understand that the first time that we would see a quarter with a complete benefit of this would be the third quarter. I don't know if I understood this right, but that's what I understood.

[Ivan de Souza Monteiro:]

André, this is Ivan. I'll give the floor to Officer Hugo. Thank you for the congratulations. I'll give your questions to Officer Hugo.

[André Natal:]

My goal was to as only one question, but I guess I asked too many.

[Ivan de Souza Monteiro:]

No problem. Our officer will answer your question.

[Hugo Repsold:]

André, thank you for the nice words. I will try to give you a general overview of the PIDV. The voluntary separation incentive program actually there were two programs

[André Natal:]

Excellent, thank you very much.

[Ivan de Souza Monteiro:]

André, your second question, what was your second question?

[André Natal:]

I believe my question will be to Mrs. Guedes, Solange Guedes. It has to do with exploratory expenses that were quite lower than the historical levels. So, it would be very useful if you could explain the reasons why this figure was so much lower. Is it because you decided to decelerate exploration for some time and should this number continue to be low in the next few quarters or was just a one-off situation? And related to this, I would like to understand what kind of consequences we could expect for the necessary rig fleet. Ms. Solange said about 30 as a minimum level necessary to carry out the plan, and this was based on a reality that was quite different from the one now, efficiency of drilling and etc. So, I would like to understand if with this new productivity data, a more recent data that you have, and together with that when you include these lower exploratory expenses, what would be the new minimum level of fleet necessary to carry out the plan?

[Solange da Silva Guedes:]

Good morning André, thank you for the question. Well this was quite an unprecedented situation regarding exploration expenses in this quarter, but I believe that Isabela was able to explain in her presentation that it was a one-off situation, it was a non-recurrent event because during the first months of 2017 we have all the internal processes in order to write-off some wells, and this is the reason why we didn't have this effect on the balance sheet of 2016, and this is the only reason why they do not appear in this first quarter of 2017. We do not expect this to be repeated in the second and third and fourth quarters of this year, it might be an amount lower than 2016, but anyway, they will have to do with the write-off of those exploratory events. And you asked about our requirement for rigs, and you mentioned a level of rigs that would meet the requirements of Petrobras, this is your question, so you are correct in part when you make this association, but it's not because of the exploratory events because we are maintaining a decision that was made regarding a reduction of our exploratory activities and there has been no change whatsoever in this dynamic, and this was a one-off effect regarding the accounting write-off in the first quarter. When you talk about the increase in productivity, we are having increasing productivity in our operation of wells and this allows us to have a more and more effective fleet management and these lead us to postpone contracts that are ending now in 2017 and we evaluate with more attention and more carefully this return to the market because of this increase in productivity that is already happening and that has been contributing a lot to our results.

[André Natal:]

Thank you very much, Solange. And very quickly, I'd like to make a follow-up on the first question that I asked. We learned through the press about a measure that you took regarding offering employees an optional reduction in their day, workday with a rebate in the salaries. So, could you give us an update about this voluntary separation incentive plan and what kind of cost reduction could come from this?

[Ivan de Souza Monteiro:]

André, this is a program, there is and enrollment deadline and we already have with our target audience of these people who are under administrative regime and that have the opportunity to reduce this to six hours. This is an optional reduction. We have already about 50% enrolled of our target audience and we still have one month for enrollment to be possible, and we believe that around 70% to 80% of these employees should enroll, and by that we will have a reduction of about BRL300 to BRL400 million per year with this reduction in the working hours per day.

[André Natal:]

Congratulations again. Thank you very much.

[Ivan de Souza Monteiro:]

Thank you, André.

[Operator:]

Next question Liliana Yang, HSBC.

[Liliana Yang:]

Thank you for the opportunity. One first question, you have already financed, you have already signed a financing with the Chinese Bank one year ago, so what is the interest rate? Do you have certain oil prices and what is the date? And the second question is the following. In relation to the assets that are in your divestment plan, in the case of the gas pipeline, are you more interested in the northeast than in the southeast in terms of gas pipelines? And what about the interest on NPR in the past, what could be changed in order to make these assets more interesting and with the potential of a better competition? And BR Distribuidora margins are better, but they are still lower than their peers’, and in your diagnoses, is there room for improvement in efficiency and do you have a plan for BR underway right now of operational efficiency?

[Ivan de Souza Monteiro:]

Could you repeat the first question, please? Because it was not understood by the company.

[Liliana Yang:]

Financing of $10 billion with the Chinese bank, have you already signed it? What is the implicit cost of this credit facility? And in terms of the oil supply commitment, what is the definition of price for this commitment of supply oil?

[Ivan de Souza Monteiro:]

I will answer your first question and Mr. Jorge Ramos will talk about distribution [Indiscernible] of which we have already dispersed 5. Our commitment is to export oil, Petrobras exporting oil and this commitment is already underway. I don't know whether you are following this because the volume of exports grew substantially and it started in the fourth quarter and it was even stronger in the first quarter of '17. So, we are fully complying with our agreement. And regarding the second part, that you say is $5 billion, we will start the process to discuss with the Chinese Development Bank regarding the second part it’s another alternative of funding, such as others that Petrobras has on the table right now. Afterwards, I would like to repeat your question afterwards. Could you please repeat your questions afterwards?

[Jorge Celestino Ramos:]

Good morning Liliana. Regarding the BR margins, we have already improved the BR margins and we have been making comparisons with our peers, and we are implementing some program for margin improvement. This program includes three actions

[Ivan de Souza Monteiro:]

Could you repeat your second question, please, about the gas pipelines?

[Liliana Yang:]

In case of NTS, I would like to understand what prevented prospective buyers? Was it something in the contract or was it because of the amount involved? Because, now you have more people interested in your Northeast gas pipelines.

[Ivan de Souza Monteiro:]

The NTS process was a competitive one, if I'm not mistaken we teasers to over 50 companies and ultimately we had the engagement with Brookfield exclusive one and with disbursement on April 4 for Petrobras, and when a decision is made about the next assets in our divestment program, this will be very useful in terms of the learning curve because this asset belonged to Petrobras alone in Brazil practicably, and there is a law, specific law in which Petrobras would not be able to make new investments if Petrobras did not dispose of this asset. This is very recent law in Brazil, so the whole array of norms and regulations regarding these assets in Brazil is very different from what we see in Canada, in the U.S. and in Europe, and the objective is to continue to develop the market, accelerate the development of the market and it tells this movement, well, you know very well that the pre-salt is a very big gas component and there will be a very big volume of gas in Brazil and we will need infrastructure in order to transport that, and we will have to encourage consumers by means of the local distributors for the participation of gas in the Brazilian energy matrix. This is a natural trend and by itself when the time comes, it should lead to a higher interest in the NTN asset.

[Liliana Yang:]

Thank you very much. And what about the US$5 billion?

[Ivan de Souza Monteiro:]

Well, we do not disclose that, Petrobras only carries out operations in which we will have a cost below or similar to your cost in the long-term secondary market.

[Liliana Yang:]

Thank you.

[Operator:]

Our next question from Luis Carvalho, UBS.

[Luis Carvalho:]

Good morning everyone. I have a couple of questions. Three. First is geared to Celestino

[Ivan de Souza Monteiro:]

Thank you Luis. I would like to ask Isabela to correct what you stated about the chart. Isabela?

[Isabela Carneiro da Rocha:]

Hello Luis, this is Isabela. I just want to clarify

[Jorge Celestino Ramos:]

Okay Luis, good morning. Regarding the operation of our refining park and what is the minimum utilization sector, what you have to understand is our model to operate our park always runs trying to get the maximum profitability for the park possible, so obviously we will look at the market share, we look at utilization factor for our refineries, we look at the margins, we look at the spreads, Brent, crude oil and based on the set of variables we decide what is the refining capacity that we are going to use, what volumes we are going to import, what volumes we are going to export and what will be the trade options that we will have. So, the number that we are operating the park with is quite comfortable in terms of profitability considering this set of assumptions that we mentioned to you, so we can get good profitability, good margins given the market conditions at this point. If the market conditions change, in other words, if margins and spreads change, it is possible that I will need to use another utilization factor for the refineries. So, I’m going to give you an example

[Ivan de Souza Monteiro:]

Luis, as for the transfer of right, the one leading this discussion at Petrobras internally is Officer Solange, so she will answer your question.

[Solange da Silva Guedes:]

Good morning Luis Carvalho, you asked about our right in the contract signed for the transfer of rights.

[Luis Carvalho:]

Actually Solange, my question is regarding your option to produce the first 5 billion barrels. This is in the initial contract and this option to produce the first 5 billion barrels and perhaps leave the rest for 30 years, this option has a value and I would like to understand how do you see this option, how do you see the possibility to monetize this and are you discussing this with the committee of minority shareholders?

[Solange da Silva Guedes:]

Oh, thank you for clarifying, this has been great so that I can answer exactly what you expect from us. Petrobras has the right in five areas to produce up to 5 billion barrels of oil equivalent, this is in the contract, you know it well, you just mentioned it. Possible surplus, anything above the 5 billion barrels this will not be produced unless we come to an agreement. So, what we are assessing today, what could be beneficial both for the company and for the government is that, somehow, we can find alternatives and possibilities that can help us monetize possible surplus, any production beyond this volume of 5 billion. But this is what we call eventual discussions as the way of getting a reimbursement. The committee of minority shareholders exists in the company for discussions of the related parties, which is the case, and this committee will follow these discussions up-close. And as you probably know, these discussions have not happened yet and ANP has not decided yet regarding the findings of a consulting company that they hired to support the positions of the government regarding the updating of the amounts paid at the time. As soon as the report from ANP is sent to the federal government, that's when the formal discussions will begin, and that's when Petrobras and the committee of minority shareholders will be involved.

[Ivan de Souza Monteiro:]

Luis, regarding hedge accounting, the company has submitted this defense at the collegiate of CVM. I'd like to remind you that the technical area of CVM had given the company an authorization to publish the balance sheet based on the methodologies that we've been using, which we believe is correct. We submitted our defense, the collegiate has not a deadline to manifested their opinion and we are waiting, and we remain available to CVM to answer any question that they might have.

[Operator:]

Our next question comes from Vicente Falanga with Bank of America Merrill Lynch.

[Vicente Falanga:]

Hello, hello everyone. Could you please remind me what is the average dollar rate in the average petroleum crude oil price that you are using for you 2017 projections?

[Ivan de Souza Monteiro:]

Thank you. Isabela will answer.

[Isabela Carneiro da Rocha:]

Vicente, we are using Brent at the same level of the first quarter, about US$54 per barrel, and the exchange rate of about 3.2.

[Operator:]

Our next question comes from André Hachem with Itaú BBA.

[André Hachem:]

Hello everyone. In terms of liability management, you've been doing excellent work to manage this debt. What would be a good amortization schedule looking forward, and which would be a comfortable payment schedule?

[Ivan de Souza Monteiro:]

André, your question is very good because, as I mentioned yesterday in the press conference, this is the first time since this management took over that we have a number of alternatives and all of them available at the same time. It includes the Brazilian capital market, foreign capital market, bilateral banks, Brazilian commercial banks, bilateral agreements with global banks, agency to foster experts and development agencies of many countries. It's all available and Petrobras looks at this in two ways

[André Hachem:]

Perfect. Thank you very much, and congratulations on the results.

[Ivan de Souza Monteiro:]

Thank you, André.

[Operator:]

Thank you very much. We are now closing the Q&A session. I now turn the floor back to Mr. Ivan de Souza Monteiro, who will make his final remarks. Mr. Monteiro, please, go ahead.

[Ivan de Souza Monteiro:]

Thank you very much. I would like to thank you all for participating in this event and I put our IR department available to answer any further questions you might have. I wish you a great day.

[Operator:]

Thank you. Ladies and gentlemen, the audio of this conference call for replay and slide presentation will be available at the Petrobras IR website at www.petrobras.com.br/ir. This concludes today's conference call. Thank you very much for your participation. Please, hang up your telephones now and have a great day.