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Petroleo Brasileiro S.A.- Petrobras  (NYSE:PBR)
Q1 2020 Earnings Call
May. 15, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Good morning, ladies and gentlemen. Welcome to Petrobras Webcast with Analysts and Investors about the First Quarter of 2020. We would like to inform you that all participants will follow the transmission by Internet as listeners. After introduction, Q&A session will begin. You can send us questions by email, petroinvest@petrobras.com.br.

Today with us is Roberto Castello Branco [Technical Issue] Andre Barreto Chiarini, Chief Logistics Officer, Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; [Technical Issue] Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations Officer; Rudimar Lorenzatto, Chief Production Development Officer, as well as other company's executives. The presentation will be available on our website.

And now, we will start with [Technical Issue] Petrobras CEO. Roberto, please you can begin.

Roberto da Cunha Castello Branco -- Chief Executive Officer

Thank you, Carla. It's a pleasure to be here with you to exchange some ideas and to disclose some information about the company. The world is dealing with three shocks. On the one hand, we have the worst public health crisis since the Spanish Flu 100 years ago and a very-severe recession, very severe and synchronized recession. All lives and livelihoods are at risk.

At Petrobras, our number one priority is health; health of our employees and health of our company. To deal with the health threats, we launched several measures to protect our employees, including a massive testing. Up to today, we have tested 22.5% of all employees and using home offices, reducing personnel operations at a level -- an average level of 50% of the total labor force at operations.

In order to deal with the threats to our health, we are preserving our liquidity, have withdrawn, revolving credit facilities and increased our total cash holdings up to $15.7 billion. We cut capital expenditures by almost 30%, $3.5 billion and are pursuing a minimum reduction of our operating costs of $2 billion. We are developing several initiatives to do that.

We organized under a liquidity committee that interacts with all of operation areas of the company. They are the sentinels of our resilience and recovery, because we are now dealing with not only the short-term, but accelerating the execution of the strategy that was put in place back in January 2019 in order to emerge from this severe crisis as a strong company able to generate a lot of value to shareholders.

I said that, we are executing several deep cuts in capital expenditure and operating costs, but we are doing this given the preservation of the safety of the company and our commitment to sustainability. Petrobras is executing its good corporate citizenship, helping the Brazilian society to cope with the threats arising from the COVID-19 virus. We have donated PCR tests, 3 million liters of fuels and several other medical and materials to public hospitals. We're helping with our scientists and our high power computers to develop research related to the COVID-19 problem.

As I said, this such execution has been accelerated. Our commitment to maximize value through the increase in return of capital employed and reduction of cost of capital remains in place. We are pursuing a full review of our product portfolio. The competition for capital was enhanced in order to have a stronger capital discipline in a scenario of lower price of oil as we are seeing in the future. We believe that the recovery will be slow and price will converge to a plateau of $50 per barrel in the future. So we have to enhance the capital discipline to allocate capital on the most efficient way. Results will be shown later.

Our divestment program remains intact, business as usual. Of course, we may have some delays in the execution, but the main block of assets, the refineries, the process is going ahead with some delay of course. But we do expect that by year end, we have signed sales and purchase agreements with several players. Different from 2008 when we had global financial crisis, now we have a global economic crisis. The central banks reacted very fast to inject liquidity in the market. So liquidity is not a problem, which facilitates the divestment program.

Well, having said that, I'll say that we are confident that with the help of professionals, highly committed with the company when we need and high-skilled people combined with world-class assets, will survive to this crisis. And after that, we'll be even stronger than we are now. We are very fastly learning the lessons offered by the crisis and these will be applied for sure in the benefit of lower cost and higher efficiency and productivity.

Now, I pass to Carla to manage the conference.

Questions and Answers:

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Roberto. Now, we begin our Q&A session. The first question comes from Frank McGann with Bank of America Merrill Lynch.

In refining, are there any issues with the mix products being produced with demand and some remaining strong? And for this week, how do you adjust the productions late? And the second question is, what's the current expectation for crude oil output over the next few months in the remainder of the year? Anelise, would like to start and then, Carlos?

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Yes. Thank you, Frank for the questions. You're right. We have to -- we have some issues with mix of products being introduced in our refineries in order to meet the difference in the demand. That's why we did some adjustments in the operational side of the refineries in order to deal with these issues. Let me give you an example. For instance, in the FCC unit, we can adjust for a certain percentage of production between gasoline and LPG. In this last week, we had an increase in LPG demand and a decrease in gasoline. So we adjust FCC units in all of refineries in order to meet this demand.

Another example concerns diesel and low fuel with low sulfur content. And sometimes we can reduce the production of diesel and increase the production of bunker low sulfur oil. This is not an easy task to do, but we can manage some in the processing of the refineries in order to use different catalysts and other things in terms of temperature, pressure that we can deal with this difference in the mix of projects during this crisis, OK?

Carlos Alberto Pereira de Oliveira -- Chief Exploration and Production Executive Officer

Hello, Frank. Regarding the expectations for crude oil output for this year and also for the next month, what we have been seeing is that the production for April that we have already realized, it's still in the same level of the first quarter, a little bit less than that because of the effects of the COVID-19 and also the effects of the reduction of the demand for oil. But the fact is that we have been having a very good operational efficiency. And we have to consider that now we have reduced production due to the fact that we have the mothballing of the shallow water platforms. And also we can have some effects regarding the people that we have on board.

And so that sometimes we have to reduce the efficiency of the platforms. But the fact is that we are still maintaining the same goal, the same target that we have for the year, the 2.7 million barrels of equivalent per day, plus or minus 2.5%. So the current scenario is we have a lot of uncertainties. It is difficult to forecast what is going to happen. But if we have the same partner and we have the same efficiency that we have been having so far, we still are keeping the same goal for the year.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you. Our next question comes from Rodolfo Angele from J.P. Morgan, regarding storage. One of the key concerns in the sector is related to the available spare capacity companies have. How is Petrobras' current spare capacity? The second question is regarding Chinese [Technical Issue] and relevant exports markets. We've been seeing some high frequency data pointing to recovery in fuel demand there. With utilization rates for teapot refiners also increasing, how does that reflect it on Chinese demand for your crude? Chiarini, would you like to start?

Andre Barreto Chiarini -- Chief Logistics Officer

Yes. Thank you, Carla. I'll start and then I'll pass it to Anelise to complement. So Rodolfo, thank you for the question. I'll start by exploring our overall storage capacity. In addition to available storage on our FPSOs, the storage on vessels performing our offloading operations, which are in transit, and I'm not talking about any vessels hired by us just for floating storage, and also considering relevant storage capacity in our refinery. We also have various terminals of our subsidiary Transpetro covering the whole country, totaling a very relevant storage capacity of crude oil.

The nominal capacity of crude oil in our system is over 15 million cubic meters. Also for storage capacity of fuel, we're talking about 4.7 million cubic meters. Currently, inventory levels of both, oil and fuels are under control, and we have enough spare capacity. Over the recent weeks, we have managed to reduce inventory levels of gasoline, which are currently within the range considered ideal for us.

With regards to crude oil inventories, we are operating within their ideal range and we are also monitoring both the adequate load of refineries and also the export volumes to operate at the lower level of such ideal range by the end of June. We have recently revised down what historically were our ideal levels of crude oil inventories so that we can generate even more cash during this crisis. We are pretty confident that if necessary, we will have the logistics boarding capacity to set even higher records in crude oil exports, at least 10% increase over the 1 million barrels per day record set in April.

Our commercial team has been developing a long-term relationship with Shandong refineries in China where our oil has strong demand, even during the crisis because crude oils from the Lula, Iracema, Sapinhoa and Buzios fields have the same overall characteristics of specific Chinese oils, such as Shengli, [Indecipherable] that are experiencing decline in production.

As we're starting to see a slow recovery in our domestic market and as we have been able to adjust the fleet and product mix of our refineries to increase production of diesel fuel oil and bunker oil, we are most probably going to have increased export volumes of those higher value-added products, thus reducing oil exports, not due to demand constraints, nor logistics constraints, but to generate higher margins. Having said that, we are not foreseeing oil production costs -- cuts, sorry, due to the demand constraints in the short-term and we are not facing any problems related to storage capacity in the near-term.

I'll pass to Anelise to follow on.

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Just a quick remark on what Andre said is that we don't see any issue regarding the demand of our crude oil, especially in China nowadays. I mean, if we have more oil to export, we will be able to find market for that. The main issue is the economics. Of course, we prefer to process this oil here in Brazil and to sell in our domestic market because of the higher margins. But what we see now is that the demand of fuel in China is ramping up very fast and they are eager to buy more oil from us.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Anelise. Thank you, Chiarini. The next question comes from Bruno Montanari with Morgan Stanley. As we are now some two months into the crisis, can you comment on key lessons learned? And how those might contribute to Petrobras emerging from this situation even stronger? Has the crisis somehow accelerated any measures that we're considering to be implemented to make the company more efficient? And the second question. As the company materially increases exports in oversupplied oil market with higher transportation costs, how does the netback of exports compare with the netback of sales on a domestic market for refineries? Roberto, would you like to start?

Roberto da Cunha Castello Branco -- Chief Executive Officer

Yes. I'll respond to the first question. Thank you, Bruno for the question. Well, first of all, we learned the most obvious lessons. We will be able in the future to reduce travel expense. No need for many travels. Home office is being very successful. We have adopted very well to home office. So in the post-COVID-19 period, we see that very feasible to walk away, 50% of our personnel in corporate activities in home office. That would save costs. We'll be able to leave several buildings and this will provide us with significant savings.

We learned also that home office has been very productive. We have a very -- worked very intensively in home office. And other lesson already learned during the crisis is that team work was reinforced with an integration of corporate and business areas has been great. So several ideas have been raised to cut costs to increase efficiency. This integration has been highly productive to us. This is the lesson learned.

Another lesson was shown in the increase of exports in the month of particularly in April where we reached an all-time high level for export of crude oil. This was feasible due to the stronger integration between logistics and marketing. And we are acquiring much more flexibility with the domestic market and the international markets. This includes not only logistics and marketing, but refining and oil production. The integration of these added much more efficiency. And we're able to discover new horizons in our ability to market and sell oil and fuels.

This is a shortlist at the moment. But I do believe that to be highly -- it has a high potential to contribute to value generation over time. So every crisis has two sides, a negative one and a positive one. We think that we are enjoying good lessons and extracting significant benefits from the positive side of the crisis.

I will pass now to...

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

It's me, Roberto.

Roberto da Cunha Castello Branco -- Chief Executive Officer

To Anelise. Sorry. I forgot the question.

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Yeah. Hi, Bruno. Just a quick comment on your question about the netbacks of export compared with the netbacks of sales to our domestic refineries. Of course, the netbacks of our domestic sales are higher than the netback of our export. But it has been like that since 2016 when Petrobras has a strategy to had this parity -- import parity prices for gasoline and diesel. It's an important pillar of our strategy to keep our company healthy.

And keeping that, having an import parity prices for our products in Brazil, we have a better netback for netback prices -- margins. And this is also done entering this crisis when the import parity prices decreased. And some people they didn't believe that we would follow this reduction in price, but we did. In the first quarter, you see a reduction in gasoline and in diesel in Brazil around 60%, not all this price went to the -- our vendors or gasoline offices, but from Petrobras refineries, we actually did a great reduction both in gasoline and diesel following the parity import price.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Roberto. Thank you, Anelise. The next question comes from Luiz Carvalho regarding our pricing policy. So oil dropped almost 70% in low and Petrobras was able to pass through refineries close to 50%. However, pump prices dropped only 10%. In addition, foreign exchange rates depreciated significantly recently. The question is, how much of a challenge will be to follow oil prices rebound and foreign exchange valuation?

Roberto da Cunha Castello Branco -- Chief Executive Officer

Well, Luiz, it's a frequent question. One of the most frequently asked questions. And the experience is telling investors and analysts that we are following international price. We have no problem in following them. Of course, during a period -- we are an oil producer, we are not an oil trading company. If we follow international price, at every moment, we have to put someone in front of a Bloomberg screen and adjusting price instantly. There is no purpose in doing that. Our pricing policy is to adjust to international price after the observation of the trend. It's much more than just having a clock to adjust every minute.

And during the severe drop in fuel price, we are not driven, just an explanation, we are not driven only by oil price, agreed, but driven by fuel price because they carry a crack spread, maybe highly positive, in some case maybe negative. So in the downward trend, we tend to have price higher than the international price during some days. In an upward trend, it's contrary. We tend to have our price lower than international price during some days, but we follow them. You will see an upward trend in gasoline price taking place since April 22, and we have made two price increases, one of 12% and other one of 10%. If needed increase -- if that needed another price increase, of course, we will go ahead. There is no problem at all. Carla, please?

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Roberto. Our next question comes from Pedro Medeiros with Citi. Can you give more color on costs and expenses savings expectations for 2020? And that's the first question. Andrea, please? And then, Petrobras has been successfully narrowing the selling discounts of its oil exports relatively to the Brent in the last quarters. Can you discuss how the selling spread of Brazil oil exports behaved relatively to the Brent throughout the second quarter?

Andrea Almeida -- Chief Financial and Investor Relations Officer

Hello, Pedro. Thanks for the question. We announced additional $2 billion reduction in operating expenses. And definitely, this is not everything that we're doing, but this is what we up to now are able to announce a number. Definitely, there are included many items. I think the mothballing of the drilling rigs, the postponement of -- the negotiation in contract that we are postponing, some payments. We started this discussion first in the postponement of payments. And now we are going to get back to the table and even connect it to the review of the portfolio.

We will be able to renegotiate with the big -- again, always important to mention, we are going to focus on the big suppliers. But after the review of the overall portfolio, we might find orders and additional cost reductions related to some of our contracts. We continue to try to find [Technical Issue] have been talking about the adjustments of our health system, we're talking about adjustment to our overall structure to reduce cost related to personnel. We will be doing additional items. But up to now, we have the overall embedded into that additional $2 billion that we announced.

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Concerning the second question, Pedro, our -- you are right, we are selling our oil relatively to Brent in good margin the next quarter, but this margin has been reduced. In the first quarter, it was lower than in the last quarter of 2019 because of the volatility of the oil price in the market. It affects also the premium of our oil. And the surplus of oil in the market also is an issue. So if you -- in my opinion, the second quarter, you'll see the same behavior, high volatility of oil prices impacting our margins in terms of oil, but still keeping positive margins, especially because of the quality of our oil, OK?

Roberto da Cunha Castello Branco -- Chief Executive Officer

Just a little remark from what Andrea said is that our capex cut that we announced for 2020 will not affect the start-up of the production system in the short-term [Technical Issue] production, just to emphasize that.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you. We just received a question. This one is from Christian Audi with Santander. Andre, you had originally planned to reduce production by 200,000 barrels a day. But given rise in export demand, should we understand that the original 200K cut will no longer be needed? Chiarini, would you like to start? We also have another question from Christian Audi to Andrea. Could you please comment on the hedge accounting for the exports contracted for April to December? What level of exports are already contracted for this period and what products are involved?

Andre Barreto Chiarini -- Chief Logistics Officer

Okay. Thank you, Carla. Yes, we do not expect to have further cuts due to demand constraint in the production of oil. We are experiencing a very volatile and complex market dynamic these days. Our teams continuously monitoring and reassessing production levels, domestic sales in order to define our let's say export targets. That can vary over time, but we are not foreseeing, as I said before, oil production cuts due to demand construction in the short-term. Andrea?

Andrea Almeida -- Chief Financial and Investor Relations Officer

Talking about the hedge accounting, I think it's important. We had an impact on the results as well together the impairments related to the hedge account. So what happened, to explain in small words, we do have a hedge accounting, considering the future exports that we have -- or the exports we have for the future, being a hedge to our debt in U.S. dollars. Whenever we have a deep reduction in the price, like we had right now, what is going to happen? The forecast of the value of our exports for the future, they are going to be reduced. So we will have last export in value to be protecting the debt in U.S. dollars. That's exactly what happens.

So what is -- and what we use to forecast the exports is definitely we have to prove or we have to use the past experience to show that we will have volumes and definitely the price we have to adjust together with the price that we adjusted for the overall portfolio. We expect the exports to continue to be the way we have seen. Again, as China has been an important, I would say, place after we see China going back, we saw higher exports as we need to the market. And we expect to continue to have that but we don't forecast. It's not just these that we are forecasting for the hedge accounting. We have to prove looking to the past.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you. Our next question comes from Andre Hachem with Itau. So in the last crisis, Petrobras took the opportunity to review several contracts. However, when looking at the current status of suppliers in the industry today, as an example, the rig services, many of them have not yet recovered from last crisis. In this regard, is there still room for further contract revision? Is there anything that can be done in regards to FPSO leases? Rudimar, would you like to start?

Rudimar Andreis Lorenzatto -- Chief Production Development Executive Officer

Yes. Andre, Petrobras procurement area with the technical areas are at the moment under a negotiation or renegotiations with the suppliers. And we have made progress in some areas. So far, we have made renegotiations movement, aiming to adjust the cash flow for 2020. And we are now planning new ways for negotiation to adapt the current contract to the new markets' reality. Rigs and leased FPSOs are strategic services and we are still studying in the detail to define some new objectives and negotiation strategies.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you. Our next question comes from Bruno Amorim with Goldman Sachs. What's the current level of utilization of the Petrobras storage facility, both oil and fuel? Is utilization still going up or it started to fall, given the recent pickup in demand in oil prices? And there is also a second question. Given the strong depreciation of the BRL, can you please remind us the impact of the 10% depreciation of BRL on your upstream EBITDA per barrel in the U.S. terms all else equal? So maybe Chiarini, would you like to start about the storage capacity?

Andre Barreto Chiarini -- Chief Logistics Officer

As I mentioned before, inventory levels of both oil and fuels are under control. And as we have enough spare space and we've been adjusting the production and also adjusting the feed of the refineries to adequately meet the demands of the internal market and exports, we don't see any problems regarding storage in the near-term. In fact, the inventory levels are going down, gasoline inventory levels have been going down over the last weeks. And also, oil inventory levels are also going down, especially by the end of June, but they're perfectly under control. And no, there's no concern about that at the moment.

Andrea Almeida -- Chief Financial and Investor Relations Officer

Okay. Following up to the question on the impact of the real-dollar on our EBITDA. I have the number for the [Technical Issue] and after the adjustments we made, we have, for instance, a change in a real-dollar. We have around $200 million impact, positive impact on EBITDA. So we see that the further depreciation of the real that we observed in the -- right now, actually, is going to further increase or improve our results in next quarter.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Chiarini. Thank you, Andrea. The next question comes from Lilyanna Yang with HSBC. So please give us some color on demand for fuel, gasoline, diesel in April and May. Is demand in Brazil recovering fast, any estimates for the second quarter, third quarter and fourth quarter in terms of demand? Please Anelise, go head.

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Hi, Lilyanna. In terms of demand for fuels, what we are seeing so far is that we had the huge impact in the first weeks of April that we got reduction on diesel around 50%, in gasoline 65%, in jet fuel 90%, and even during April and now in May, we are seeing a recovery especially in gasoline, but also diesel is getting better and other products also. Our main concern is jet fuel. We don't believe that jet fuel could be recoverable as soon because of the international flights and all over the world; it's not only in Brazil. And this will affect probably the demand of jet fuel the whole year. But diesel, gasoline, bunk and naphtha and other oil products, we are seeing almost a complete recovery in the third quarter and fourth quarter, OK?

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Okay. Thank you. Our next question comes from Vicente Falanga with Bradesco. How are the conversations with local groups about the sale of refinery going. With the exchange rates at six, does this impact the transactions? Anelise, would you like to start?

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Well, we are talking with different players that are interested in our refinery. It's not only local players, but also international ones. As I said, we see that the interest keeps -- is continuing. So we don't see any of the players saying that they will give up. It's a good sign. And what we see is that we have to postpone the binding offers because of the crisis. And we hope that by the third quarter or fourth quarter of this year, we could have the binding offers already presented, so we can go on with the negotiations with the first player and sign a contract in the first quarter of 2021.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, Anelise. And now it's our last question. Our last question comes from Barbara Halberstadt with J.P. Morgan. So this is for Andrea. What's the plan regarding the debt level in your liability management plans for the year? Is there any risk of covenant breaches?

Andrea Almeida -- Chief Financial and Investor Relations Officer

So thanks for the question. Regarding the debt level, we announced that we want -- or our goal for the year is to end the year with $87 billion of total debt. If we can do better, definitely, we will look and try to do better. But that's the goal for the year. And in the medium and the long-term, we keep the $60 billion. That's the debt we believe is the one that Petrobras should have to be prepared for the volatility on any scenario, including the one we are just experiencing right now. Regarding liability management, we will look for opportunities for -- always actually, this is always. Now we are focused on liquidity, but if there is opportunity in the market to extend the term of the debt and roll some of the debt that we just got, definitely we will take the opportunity. And the last point was?

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Regarding covenants.

Andrea Almeida -- Chief Financial and Investor Relations Officer

Okay, covenants. The covenants, we just have -- the debt with MBS with financial covenant. There is net debt to EBITDA of 5.5. We don't believe we are going to get there, but, we have all the documents ready even to ask for waiver if necessary.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you, all. At this time, our Q&A session is over. If you have any further questions, please send us an email to our Investor Relations team. And now, Roberto will make his final remarks. Please Roberto, go ahead.

Roberto da Cunha Castello Branco -- Chief Executive Officer

Thank, Carla. I'd like to thank you for your interest and attention to our video conference. As I said before, we are very confident on the survival and emergency of Petrobras as a stronger company. During a crisis, courage and optimism are key. And we have as our main allies in this process, highly committed people and highly skilled people. And these combined with the world-class assets we have, I'm sure that Petrobras will continue to generate a lot of value to shareholders. Thank you. And I expect to see you soon in another opportunity.

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Thank you. Ladies and gentleman, the audio of this webcast will be available at Petrobras website. Thank you very much for your interest, and have a great day.

Roberto da Cunha Castello Branco -- Chief Executive Officer

Stay safe.

Duration: 47 minutes

Call participants:

Carla Dodsworth Albano Miller -- Investor Relations Executive Manager

Roberto da Cunha Castello Branco -- Chief Executive Officer

Anelise Quintao Lara -- Chief Refining and Natural Gas Executive Officer

Carlos Alberto Pereira de Oliveira -- Chief Exploration and Production Executive Officer

Andre Barreto Chiarini -- Chief Logistics Officer

Andrea Almeida -- Chief Financial and Investor Relations Officer

Rudimar Andreis Lorenzatto -- Chief Production Development Executive Officer

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