Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) Q1 2023 Earnings Call Transcript May 12, 2023

Carla Albano: Hi. Good afternoon, everyone. Welcome to Petrobras Webcast with Analysts and Investors about the First Quarter 2023 Results. It’s great to have you join us today. We’d like to inform you that all participants will follow the transmission by Internet as listeners. After an introduction, a Q&A session will begin. You can send us questions by e-mail at petroinvest@petrobras.com.br. Today, we have with us Anna Paula Zettel, Upstream Executive Manager representing the Chief Exploration and Production Officer, Joelson Mendes; Carlos Travassos, Chief Engineering, Technology & Innovation Officer; Clarice Coppetti, Chief Corporate Affairs Officer; Claudio Schlosser, Chief Logistics, Commercialization & Markets Officer; Mario Spinelli, Chief Governance & Compliance Officer; Mauricio Tolmasquim, Chief Energy Transition & Sustainability Officer; Sergio Caetano Leite, Chief Financial Officer & Investor Relations Officer; and William França, Chief Industrial Processes & Product Officer.

To begin, we will watch a message from our CEO, Jean Paul Prates.

Jean Paul Prates : Dear investors, as we open this event to discuss our results, I believe it is of the utmost importance to talk about the future of Petrobras and the perspectives opened up by yet another quarter of solid operational and financial performance, the first under this new management team. In these first 100 days, we focused our efforts on reorganizing the company structure, preparing Petrobras for the future, especially to lead the just energy transition. We continue to reach production records in the pre-salt, and to increase the efficiency of our refineries. Our operating cash generation remains consistent and our debt reached the lowest level since 2010. We have solid fundamentals, which underpin our plan to diversify our investments to strengthen Petrobras as an integrated, robust and long living energy company.

We will always pursue returns on investments and reductions in the cost of capital, maximizing the company’s value and seeking to develop the Brazilian market with sustainability. Total attention to people is our nonnegotiable priority, because only a skilled and diverse technical staff will allow us to meet the dynamic demands of the market, especially the energy transition. The investment in profitable exploration and production assets and in adjusting the refining facilities to the Brazilian markets demands our natural movements to ensure the energy supply that society needs. We will continue our efforts to decarbonize our production processes and to develop greener products, which we understand to be the only way looking forward for the oil and gas industry, reducing its emissions and consolidating clean energy alternatives.

In fact, we are convinced that Brazil and Petrobras have all the conditions to be global leaders in a fair energy transition without ceasing to be an oil power, establishing partnerships with other companies and taking advantage of the different vocations and potentialities of all Brazil’s regions. We will build this route alongside our partners. This is our path going forward. We make decisions always reconciling our social function and respect for our governance, honoring the trust placed in our company by our shareholders. This is my greatest commitment, as well as that of the entire Executive Board, which I represent. Thank you very much to all of you.

Carla Albano: Thank you. Now I’d like to pass the floor to Petrobras CFO, Sergio Caetano Leite. That will begin our webcast presentations of the first quarter 2023 results. Please Sergio, go ahead.

Sergio Caetano Leite: Hello, everyone. Good morning. I’m very happy to be here reviewing today my first quarter results webcast, and even happier to talk about the important and solid performance that Petrobras delivered in the first quarter of 2023. We had very strong quarter from an operational and financial perspective and I will take a moment to highlight several important deliveries. First, from an operational angle, pre-salt production set a new monthly record in February 2023, and a quarterly record, reaching 77% of our total production. In February, we also had a monthly production record at the FPSO Guanabara in the Mero field whose average oil production reached 179,000 barrels per day. We made the first injection of gas at the P-71 with continuing its ramp up in the Itapu field in Santos Basin pre-salt.

The production of diesel gasoline and jet fuel in the first quarter of 2023 reached 67% of total production, 1 percentage point higher than the first quarter of 2022. We also set production records for 10 PPM diesel at REPAR and REGAP refineries in January and the REPLAN refinery in March. We advanced in development of more sustainable and efficient products with the certification of Diesel R at the REPAR. The launch of new premier gasoline, the exclusive commercialization of fuel oil with a maximum of 1% sulfur content in the domestic market and with the beginning of trade of Ultra Low Sulfur Marine Gas Oil. Here it’s important point out that we have recently undergone the organization adjustment to prepare the company for the future by creating the energy transition and sustainability executive option.

Any match we carry out the remain procurement to resume the works of the natural gas processing needs of the integrated project Route 3 in the GASLUB cluster in Itaboraí, which is strategic for the new natural gas flow from the Santos Basin. Move over the financials, I would like to highlight our EBITDA which reached around $14 billion, a very robust amount for fourth highest Petrobras history. We had consistent operating cash generation with cash flow from our operations reaching the solid mark of $10.3 billion. The net debt EBITDA ratio reached its best mark since 2010. It’s also important to highlight that we had the lowest level of gross debt since 2010, reaching $53.3 billion. Return on capital employed reached 15.7%, the same level as in first quarter of 2022.

And our net income reached $7.3 billion, and the free cash flow was around $8 billion, which are very significant levels. We continue with commitment to generate value and financial sustainability by distributing results to society. As can be seen in our fiscal report, in the first quarter of 2023, we paid R$63 billion in tax and government take, we also paid $4.2 billion in dividends, bringing our cash levels to $15.8 billion. In terms of the external environment, in the quarter, we had 8% drop in Brent prices and the average exchange rate went down 1% when compared to the fourth quarter of 2022. Next slide. As already mentioned, we had very robust EBITDA. Recurring EBITDA in the first quarter of 2023 reached $14.3 billion, in line with the first quarter of 2022.

Despite the 8% devaluation of Brent mainly explained by lower exploration expenses and legal contingencies. Next slide. Delve into the results by business segment. In Exploration and Production, the impact of the Brent devaluation was partially offset by low expenses and higher productions, causing the segment’s EBITDA to decline 1% when compared to first quarter of 2022. In the downstream segment, EBITDA was 15% lower than the previous quarter due mainly to the effect of inventory turnover with reduction of Brent between the quarters. When look at the replacement cost, the results for the quarter grew 3% reflecting higher margins on oil products, main gasoline, due to the appreciation of the international margins. In Gas and Power EBITDA rose 16% due to the favorable scenario and the actions taken to build a commercial portfolio resilient to the business risks.

Next slide. As mentioned early, the results generated by operating activities and free cash flow reached very significant levels. The level of cash flow generation, together with the inflow of resources from divestments were used to remunerate the shareholders, make investments, prepaid debt and amortize the principal and interest during the period and amortizing leasing liabilities. Next slide. And when we look at our debt position, we have a very comfortable debt profile in terms of liquidity and financial strength. At the end of the first quarter of 2023, gross debt reached $53.3 billion as already stated, that’s the lowest level since 2010. Net debt was $37.6 billion, a drop of 9.5% compared to year end 2022. Our cash position remains quite robust, reaching $15.8 billion at the end of the first quarter.

In addition, it’s worth noting that we have variable revolving credit lines of $9 billion. We closed the quarter with an average funding rate of 6.5% per year in an average maturity of 12 years. Next slide. In relation to portfolio management, we are reassessing the process in which no contracts were signed. It’s important to emphasize that the projects that have already designed which are in current closing stage, shall be honored by the company. Up to April 2023, cash inflows related to these divestments totaled $2.1 billion. In the first quarter of 2023, net income was $7.3 billion, compared to $8.2 billion in the fourth quarter of 2022. This result is mainly explained by the Brent devaluation and lower financial results, partially offset by the lower operation expenses.

In the addition, there was a higher income tax expense, which was mainly due to the absence of tax credit in the fourth quarter of 2022 because of the dividend distribution for fiscal year 2022 as interest on equity. In this first quarter of 2023, tax and government take to federal, state and municipal governments amounted to R$63 billion represent the return to society of 54% of the company operating cash generation. I finish here my presentation. Please, we can move forward.

Carla Albano: Thank you, Sergio. Now, I’ll pass the floor to Chief Energy Transition and Sustainability Officer, Mauricio Tolmasquim. Mauricio Tolmasquim, go ahead.

Q&A Session

Mauricio Tolmasquim : Hi, good afternoon. It’s a great satisfaction that I’m here today as the first Chief Energy Transition and Sustainability Officer in Petrobras’ history to present to the market the excellent results obtained off the first quarter of ’23. Please next slide. As we can see in the graphs, we remain aligned with our sustainability commitments with carbon intensity levels below 2022. The carbon intensity in our Exploration and Production operation reached 14.7 kilograms of CO2 by barrel in the first quarter of ’23, is the first figure out. This level is lower than that achieved in 2022 and this is the result of our continuous effort to reduce emissions from our operations. We have reinforced the competitiveness of pre-salt oilfields which represent an increasingly relevant percentage of the company’s total production.

Why this is important? This is important because the initial intensity from the pre-salt field is lower than the other fields. For example, if you look Tupi and Búzios fields, both had emissions of 10.6 and 9.3 CO2 per barrel, respectively. So, these figures are well below the national and international emission intensity. When we look to the next graph, at the refining indicator, you can see a continuous reduction in carbon intensity tool. This improvement is associated with increased energy efficiency through for instance, the reduction of gases sent to the torch and process virtualization. Finally, look, the third graph, I would like to highlight the decrease in carbon intensity from thermal power generation. There are two explanations for this reduction in the carbon intensity.

First, the improvement of the thermal power plants itself; and second, the reduction of the dispatch of thermal power plants, reducing the dispatch of the less efficient plants. Next slide please. So now let’s take a look to the absolute emissions. In terms of absolute emissions, there’s also a good performance. There was an important reduction of total operational emissions between 2022 and the first part of ’23. The same happened regarding the operational emission from oil, gas as you can see in the other graph. What concerns the total emission? There are two main explanations for the emission reductions: First, the improvement in our process; and second, the reduction of thermal power plants’ dispatch. The slide — first slide please. This first slide, I would like to highlight this slide, three aspects related to climate and decarbonization.

The first point to be highlighted is related to the climate supplement. In the period, we released the new editions of the climate supplement with information about progress made in the carbonization pathway, the carbon neutral program and other decarbonization initiatives. The document details information regarding emissions performance in 2022 and the project already implemented, can be find also in this report. It presents also company’s strategy, risks and governance about the challenge of climate change. We detail in the document our actions to reduce methane emission, our position on just transition and the strategy to use carbon credits. I invite all to read this document. The second point that I want to highlight is that in the period, we made some important partnerships to leverage new business and carbonization opportunities.

And finally, the third point to highlight concerns our supply chain. We are — I referenced sustainability by CDP indicator, our commitment to encourage good environment practices and climate change mitigation measures when dealing with our supply chain. Finally, the last slide please. In the last slide, we are going to focus on the Gas and Energy segment. The performance of the period — in the period was quite robust. It is the result of actions to build a commercial portfolio resilience to business risk that explains this good performance. Petrobras continues working to meet its contractual commitments for the sake of gas in this quarter. It’s achieved 100% delivery to reliability. In the first quarter of 2023, the Petrobras natural gas market remained at the same level of the first part of ’22.

However, compared to the first quarter of ’22, there was a decrease of 16 million cubic meters per day. Two factors displaying this drop: The first is the opening of the natural gas marketing in the country. And as consequence, the increase in the participation of order agent get used to — that produce gas and use to sell it to Petrobras that are now selling to the market directly. Another factor that explain this reduction of the market was the lower thermal consumption given the recovery of reservoir levels. In April, the levels of the reservoir ended at 88% at very high level in the power sector — Brazilian power sector. The lower thermoelectric dispatch partially displaying the excellent result of this follow-up in this first quarter.

Why that? Because the drop of thermoelectric dispatch need that less LNG was important at the time when the fuel is very expensive in the international market. So, the lower dispatch of thermal power plant at this moment where the natural gas price is very high in the world, was very good for Petrobras result. It worth also mentioning regarding the relationship, which in the long-term market of gas distributor, commercial action to solve disputes that arose in the recent past, the signing of a new contract with an extension of sales portfolio. That was I had to say now. Thank you very much.

Carla Albano: Thank you, Tolmasquim. Now, we’ll continue with Carlos Travassos, Chief Engineering, Technology & Innovation Officer to present the E&P results.

Carlos Travassos: Thank you very much, Carla. Good afternoon, everyone. I’m Carlos Travassos, Engineering, Technology and Innovation Chief Officer. Today I will present both the results of Exploration and Production and Engineering, Technology and Innovation. Joelson Mendes was — underwent a minor surgery and he will not be able to be here with us, he is fine. And by next week, he is going to be back. Well, let’s start with the next slide. So, you can see here that we have reached 2% growth on the operative production in comparison with the first quarter ’22. We achieved 3.74 million barrels a day, what I mean by barrels, I am talking about equivalent agents here, yes. So we can see growth comparing with the last quarter of ’22 and then also 2.3% if we compare with the first quarter of the last year as well.

If you take a look in oil and gas and our oil production, again, we had a growth compared with the last quarter. This growth was mainly due to ramp up of P-71 and for entry of eight wells in Campos Basin and also improvement in our efficiency. Going to the right, if you take a look in pre-salt, our own production. And we can see that increasing of the share of pre-salt in our total production. We achieved in this quarter 77% of pre-salt production as a share of our total production. Now we can go to the next please. And now we’re talking about some achievements, important achievements. Actually we have broken some records, we’ve broken a monthly record 2.13 million barrels a day that was taking place in February and actually a quarterly record with 2.05 million barrels.

And if you take a look in individual production as well, we have an amazing result to Guanabara FPSO, 179,000 barrels a day, what means 100% efficiency that was achieved on February. The last time that we have any record was in November with Carioca. So that means that we’ve just broken our record. We can go to the next please. Now, let’s talk about costs. Yes, now I’m showing you a little bit about our lifting costs in Brazil. Just to understand this picture, we’re segregating in three layers. Yes. So the yellow one is onshore and shallow waters, that will reduce our costs from 18.8 in the last quarter of last year to 14.7. This majorly related some portfolio movements that we have done. And then we also had results of lifting costs in deep water, basically in Campos Basin, but not only Campos Basin, but basically there.

When we have — here you can see a drop as well of the costs mainly due to the wells that we put in production. And of the pre-salt as well having a good result paving to ramp up of P-71, yes, that’s so — those results bring us a drop of the car lifting costs from 6.1 to 5.5, yes. Now showing a little bit about total cost of oil production. Yes, so if you take a look in the last quarter of ’22, that was 38 and we have a reduction of 11% on that cost. So here we include depreciation, depletion, amortization and the government take is considered here and of course the lifting costs, yes. Of course important to highlight that here we must include for them to have a view of total costs. We are not included that numbers in those numbers. The investments is not here, yes, and the capital cost is not here as well.

We can go to the next please. Oh, yes, now talking about our exploration. We achieved discovery in 2021 and we are — now we have started extension well really at Aram block, Curaçao. Yes. So this is the first — the first thing that we are doing the first well, yes. We have six more to be done and to declare as a commercial one. Okay, I think this is the last one for exploration production. Now I start talking about engineering, technology and innovation, if you can go to the next please. Okay. Here we have a picture of Anna Nery. Actually this unit just started production in Anna Nery, at Anna Nery to connect the second well, that unit. Reminding you, that is part of Marlim revitalization program, yes. The Marlim revitalization, if you can go to the next please.

In Marlim revitalization we are going to remove nine units, yes, and going to replace by two units: Anna Nery and Anita Garibaldi. Anna Nery, we have started production. Like I said Anita Garibaldi is we added in mooring at this moment, yes. Actually now if you take a look in our strategic plan, ’23-’27, yes. From these 18 units, we have four in final location P-71 that is already in production, that we anticipated, Anna Nery now is in production as well. And Anita Garibaldi, that is in mooring process. And we also have Almirante Barroso, that is ready to start production waiting for authorization. Coming back to the revitalization, that’s a fantastic program. And we intend to increase 20% in our production and reduce 6% of greenhouse gas, yes.

And this is a progress — all the time that we are talking about production systems, are used to show the units. But it’s important to remind that we have a subsea working and a very hard subsea working, especially when talking about revitalization, when we’re going to build 14 new wells and relocate six wells. So — and in these kinds of projects, we have a especial feature that we also have to remove some lines here and there that’s required for us, synchronization and very good planning to do. Now we can go to the next please. Here talking about updating the start-up schedule for ’23-’27. I think you all of you are very familiar with this picture, yes. That’s the 18 units that we are going to start operation and this is strategic plan and we have made some shifts with Búzios 7 IPB, just highlighted that we’re talking about.

Despite all that is changing the year, we’re talking about minor shifts is not big and there is impact on our production growth. In this slide, you can — also you can see the picture of P-78 for Búzios unit, for Búzios that is in under construction. Now, you can go to the next. Oh, yes, talking about downstream, yes, we have a very important achievement in this quarter that we signed the contracts to restart our process gas units in Itaboraí, GASLUB, yes. So that was interrupted next year. And we got pulling back again in the fantastic time, in six months’ times. Now we have to hold the contract, sign it. And actually the people mobilize on site, yes. So we keep the planning to start operation 2024. And another really important achievement, this is the contract extension of Train 1 of RNEST.

So Train #1, we actually are going to expand from 115,000 barrels a day to 130,000 barrels a day. And the completion of this work is scheduled for 2024. And just another information, probably most of you know, we have already in construction the air emission removal unit as the construction is in progress in RNEST as well. Well, that’s what I have for today. Thank you very much for your attention.

Carla Albano: Thank you, Travassos. Now I will pass the floor to William França, Chief Industrial Process & Product Officer. William, go ahead.

William França: Good afternoon for everyone. It’s a pleasure to stay here and to present the highlights of refining segment in the first quarter of ’23. And I’m so happy to be in charge of our refineries in the oil and gas plants. In the first quarter of ’23 — I’m sorry, we are going to prioritize two indication on this presentation, okay: utilization factor refineries; and operation availability. In the first quarter, the utilization factor in our refineries was 85%, I think that is an important and excellent result considering that we had three big turnarounds during this period in REFAP, REVAP and RPBC. We spend almost R$1.2 billion by maintaining more than 800 larger equipments, like you had changes, pipelines, pumps, towers and reactors.

And we had more than 10,000 collaborators contributed and performed in this big challenge, helping us. In April, we had our utilization factor of 29%. In that beginning of May, we are performing above 90%. Regarding the operational availability, in the first quarter of ’23 we obtained a result above 96%, which most of our refiners achieved the level of the best refineries including the companies of United States, okay? Thank you for your concentration. Have a nice day.

Operator: Thank you, William. Now I’ll call Claudio Schlosser, Chief Logistics, Commercialization and Markets Officer. Schlosser, go ahead.

Claudio Schlosser: Yes, thank you. Hello, everybody. It’s a pleasure to be here with you today to talk about our first quarter ’23 results. Next slide please. On this slide, we’ll talk about the oil product sales. As you can see, there was a reduction in sales of oil products in the domestic market, dropped 5% compared with the previous similar quarter. This was already expected, as diesel and gasoline seasonally have a weaker consumption in the first quarter of the year. It is important to see that in this quarterly composition, there is still the impact of divestment of REMAN, REMAN we had to cool in at the end of the last year. Even so, it is important to highlight that gasoline sales were the highest versus that the first quarter in the last six years, driven by the greater competitiveness of gasoline in relation to ethanol.

Regarding the foreign markets, the drop of fuel oil export was caused by lower production due to the scattered shutdowns of some of our biggest refineries, as mentioned by Director William. Typically the topic of the product sales, I will like to take the opportunity to bring for us our focus on the market. Retail market has even become part of the name of this world. That’s why I want to highlight the startup of the new diesel and gasoline sales center in November in Almirante Barroso, Búzios. This action constraints our presence in the Midwest and enables the practice of specific commercial action in the region. This is a very important milestone that guarantees Petrobras’ presence in the region that should grow the most in the coming years.

Next slide, we will talk about oil exports flow. As you can see in this slide, talking about oil exports, our main destination remains China. However, it is important to enhance that we continue to work constantly to seek global opportunities and to develop new clients, which generate more value for Petrobras in addition of diversifying the client portfolio. Another key action is the market development for oil streams such as Sururu, Mero and Atapu. The Búzios and Tupi streams are already well known in the international market with the guarantees and better liquidity in the pricing. Next slide. Finally, I present the highlights of the quarter that reinforce Petrobras’ commitment to supplying more responsible fuels. We have our first bunker filling fleet vessel with renewable content with Darcy Ribeiro, this ship that is in the picture and it’s part of the Petro strategy.

This fuel was formulated with 10% soy biodiesel, reducing about 7% of greenhouse gas emissions, considering the complete lifecycle of the fuel, a big step towards the goal of reducing carbon emissions. During the 40 days of testing, no anomalies were reported by the fuel or operational differences in relation to the mineral bunker. Samples of collected fuel and ship monitoring data are in the final stage of analysis. Another action in the same line was that we started offering the domestic market exclusively fuel oil with a maximum sulfur content of 1% discontinuing the sale of fuel oil with a maximum sulfur content of about 2%. By ensuring that all fuel oil sold by the company in the domestic market has a low sulfur content, we help consumers in the industry segment to reduce their emissions.

I also highlight the sales of the new product, the Ultra Low Sulfur Marine Gas Oil, marine fuel with the maximum sulfur content of 0.1%. The new marine gas oil is produced at the Presidente Bernardes refinery, RPBC in Cubatão, São Paulo. Previously, the products sold at the Port of Santos to long haul and the [coverage] ship haulers was conventional Petrobras marine gas oil containing a maximum super content of 0.5%. And introducing this Ultra Low Sulfur MGO, we started helping ship haulers to reduce emissions of the problem content sulfur oxide, in addition to avoiding fueling stops and all the way up the vessels passing through the sulfur emission control areas, reducing the cost and the time. These actions show that we are on the right track in developing cleaner fuels and guaranteeing lower emissions, generating great value for the company, society and the environment.

That’s the final slide. And going back to Carla.

A – Carla Albano : Thank you, Schlosser. Thank you all, we can move on to our Q&A session. And the first question that we received comes from Bruno Amorim with Goldman Sachs and it’s for Sergio. Sergio, Petrobras CapEx is poised to grow in the next few years under the current and possibly the new strategic plan to be announced, what is the comfortable level of cash position the company should target, more, less or in line with the prior management target of $8 billion?

Carla Albano : Thank you, Tolmasquim Thank you all. At this time, the Q&A session is over. If you have any further questions, you can send to our Investor Relations team. I’d like to thank you all for your attention. It’s very important quarter with a solid result from operation and financial point of view. Thank you all and have a great day.