Petrobras´ Performance – 3Q2019

Oct 24, 2019

MESSAGE FROM THE CEO

The company’s performance in 3Q19 is already starting to reflect the implementation of our value creation strategy.

Oil and gas production reached a record level of 3.0 MMboed in August, when a daily record of 3.1 MMboed was also reached.

The ramp-up of the new platforms significantly influenced production growth, with pre-salt accounting for 60.4% of Petrobras’ total oil production in Brazil. The FPSO P-76, operating in the Búzios field, completed the ramp-up in 7.7 months, another record to celebrate, which has a positive effect on the investment rate of return, in line with one of our strategic pillars: the focus on capital allocation efficiency.

Given the scarcity of resources, projects have to compete for capital, which is allocated only to the best ones, taking into consideration expected risks and returns.

Pre-salt cash cost (lifting cost) reached an unprecedented level of US$ 5.0 per boe, which contributed to the company’s average lifting cost avering less than US$ 10 per boe (US$ 9.7 per boe).

Several initiatives are underway to cut costs on a permanent basis. Processes are being redesigned and we have launched a family of voluntary dismissal programs for which more than 2,000 employees have already applied, allowing us to vacate four buildings by the end of the year. We are moving from 18 offices outside Brazil to just five and several other measures are being implemented with the use of digital transformation.

Despite the drop in oil prices, from US$ 75.27 in 3Q18 to US$ 61.94 per barrel in 3Q19, operating cash flow of US$ 32.8 billion reached a record high.

Improved capital allocation is being pursued through portfolio management, with divestments of assets with low return on capital employed.

In 3Q19 we transferred the shares of Montevideo Gas and Conecta, the gas distribution companies in Uruguay, to the Government of that country, and sold our stake in Belém Bioenergia, assets that generate systematic losses to Petrobras over several years.

In November we will receive non-binding offers for the sale of the RNEST, RELAM, REPAR and REFAP refineries and we expect to conclude the agreement for the sale of Liquigás. At the same time, we have already begun receiving non-binding offers for the sale of the REGAP, REMAN, LUBNOR and SIX refineries.

In line with the strategic objective of reducing the cost of capital, we are increasing transparency, reducing debt and extending its duration.

The Board of Directors approved a shareholders’ compensation policy, which defined objective parameters for the payment of dividends and interest on capital. Annual shareholder compensation can exceed the legal minimum once gross debt reaches less than US$ 60 billion, when the company will distribute to shareholders 60% of the difference between operating cash flow and capex.

Petrobras’ gross debt reached US$ 90 billion on 9.30.2019 against US$ 101 billion at the end of 2Q19, which happened to be equal to Argentina’s current foreign debt. The average cost of our debt fell below 6.0% per year, reaching 5.9% per year, while at the same time the average duration increased from 10.25 years in 2Q19 to 10.42 years.

Three transactions were emblematic: (a) the securitization of Eletrobras’ receivables in the amount of R$ 8.4 billion, turning a page in our history; (b) the debt exchange offer maturing between 2023 and 2029, totaling US$ 3.7 billion, for a new bond maturing in 2030 and with an yield to maturity of 5.093% a.a., the lowest since 2013; (c) the issue in the domestic market of an infrastructure debenture in the amount of R$ 3 billion, the largest offering distributed in the history of the Brazilian capital market, with duration of 10 and 15 years and a rate of 3.9% p.y. after swapping to US dollars.

On October 3, we launched the 4th cycle of the Commitment to Life Program. Among the various initiatives of the program, the following stand out: the strengthening of the high performance culture in health, environment and safety (HES), with emphasis on human factors and process safety, digital transformation and inclusion of new technologies in the processes, promoting increased safety and value creation for the business. Since the first cycle of the Commitment to Life Program in 2015, we have been able to reduce the Total Recordable Injuries (TRI) from 2.15 to 0.75 in 3Q19, the lowest quarterly value recorded and lower than the oil and gas industry benchmark of 0.80.

Given that our oil production is low in sulphur, we are expanding the production of bunker oil 0.5%, for which global demand is growing to meet IMO 2020 specifications, which seeks to reduce greenhouse gas emissions.

Since September 12, Petrobras has been allocating resources to deal with an unprecedented environmental disaster in Brazil, using its scientific laboratories to analyse the oil that reaches our beaches and helping to clean up with people and equipments, in an effort to mitigate the effects of this phenomenon on people and the environment.

We are pleased with the results achieved and even more so with the engagement of our employees in implementing the company’s transformational agenda in pursuit of value maximization.

However, we have to recognize that much remains to be done, we are only at the beginning of a journey with many important obstacles to overcome. We are still a heavily indebted company with high costs in an industry that faces major challenges in a global scenario of rapid changes and growing interdependence between different economic activities. Recognition of our deficiencies increasingly encourages us to work towards becoming the best energy company in generating shareholder value, focused on oil and gas, with safety, respect to people and to the environment.

Highlights of 3Q19 results:

§ The Company’s recurring net income and adjusted EBITDA were R$ 10.0 billion and R$ 35.1 billion, respectively, excluding the effects of special items.

§ Considering the special items, net income reached R$ 9.1 billion, mainly reflecting the increase in oil and gas production and the capital gain from the sale of BR Distribuidora.

§ Adjusted EBITDA was R$ 32.6 billion, stable compared to 2Q19 despite the drop in Brent prices, as a result of solid operating performance, with higher margins on diesel and LPG, higher export volumes and of oil and diesel sales in the domestic market.

§ In 3Q19, the adjusted net debt / LTM EBITDA ratio dropped to 2.58x versus 2.69x in 2Q19, applying the effects of IFRS 16 throughout the whole LTM EBITDA period. Once these effects are eliminated, the ratio would have been 1.96x in 3Q19.

§ The Board of Directors approved the anticipated distribution of shareholders’ compensation in the form of interest on capital (IOC) in the amount of R$ 2.6 billion, equivalent to R$ 0.20 per common and preferred share.

Read Full Report  Petrobras 3Q19 Full Report