PETROBRAS NET INCOME $1.3 BLN
PETROBRAS - Operational performance 2Q19
MESSAGE FROM THE CEO
Petrobras had a good financial performance in 2Q19, although we benefited from external factors beyond our control, such as oil prices, the BRL/USD exchange rate and crack spreads, and non-recurring events, such as assets divestments.
Accounting net income excluding non-recurring factors was US$ 1.3 billion and operating cash flow reached US$ 5.2 billion. Advances in pre-salt exploration, with lower lifting cost (US$ 6/boe) and better quality of oil, allowed adjusted EBITDA per barrel of oil equivalent (boe) in the exploration & production (E&P) business to reach US$ 33.50 in 2Q19 against US$ 29.50 last year, despite the drop in average Brent oil prices from US$ 71.0 to US$ 68.8.
Our gross debt (including the effects of IFRS 16) remains at a high level, at US$ 101.0 billion, with leverage ratios ranging from 2.5x to 3.0x, depending on the metric used. Petrobras is still facing excessive financial leverage for a commodity producer which is therefore exposed to price and, consequently, cash flow volatility. Financial charges still consume around 40% of operating cash flows, which evidences the need for divestments to reduce debt.
On the other hand, we ended the quarter with a net debt of US$ 83.7 billion, which evidences an excessive cash position, of US$ 17.4 billion as of June 30. 2019. This was due to the fact that the proceeds from the sale of TAG were received in the last days of June. Granted, this is just a snapshot taken on a given day and the excess cash is being used, our goal being to maintain a cash position of US$ 6.6 billion given the availability of revolving credit facilities. Thus, gross debt is expected to decline in 3Q19.
For the sake of transparency and efficiency in capital allocation, we revised 2019 capex budget from US$ 16 billion to a range of US$ 10 to US$ 11 billion. It is worth emphasizing that these figures do not include estimates relative to the amounts to be invested in exploration blocks bid rounds in this semester, including those related to the Transfer of Rights excess barrels, for which, after several years of negotiations, we have quickly reached an agreement with the Federal Government.
Return on capital employed so far is hovering around 8%, which evidences the imperative need for initiatives to improve capital allocation.
The year has been very intense in what regards the implementation of our transformational agenda based on our five strategic pillars.
Divestments totaled US$ 15 billion by the end of July, notably TAG and BR Distribuidora - the first capital market privatization in Brazilian history - and mature oil fields. We still have a 37.5% stake in BR's capital, which in the future we intend to sell partially or wholly. Meanwhile, we will benefit as shareholders from BR's enormous value creation potential with the flexibility that a private company possesses.
The divestment of mature fields, with low productivity and high lifting costs and for which we are not the natural owners, offers excellent opportunities for high returns for Petrobras. Simultaneously, their revitalization by the new owners fosters investments and job creation, with a positive impact on economic activity.
In 27 days, between June and July, at our initiative, we have signed two agreements with CADE (the Brazilian anti-trust authority) that enable the opening for competition of two important markets, refining and natural gas.
Petrobras has committed to sell 8 refineries, half of its refining capacity. The first package of 4 refineries (RNEST, RLAM, REPAR and REFAP) has already advanced to the non-binding phase and the teasers for the second package (REMAN, LUBNOR, REGAP and SIX) will be launched next month.
We are firmly committed to completely disengage from the natural gas transportation and distribution business and to reduce our share of purchases to less than 50%, thereby focusing on exploration and production.
We need midstream asset services, but we don't need to own them. The idea is to be an asset-light company in the midstream and a world class asset-heavy company in oil and gas exploration and production, maximizing the return on every dollar invested.
We are gradually managing to eliminate our participation in businesses that bled Petrobras' cash for several years. We have closed an agreement with the Uruguayan Government for the return of gas distribution concessions - Montevideo Gas and Conecta - which had required fifteen capital injections in fifteen years, consuming US$ 200 million.
With a divestment program already crafted, the priority going forward will be the structuring and execution of transactions.
The voluntary dismissal program – focused on retirees and employees eligible for retirement - had 1,560 enrollments by the end of July, and several employees are in the process of leaving the company.
The search for lower costs continued with the rationalization of office space, which is allowing the release of rented buildings, the closing of offices outside Brazil (New York, Mexico City, Libya, Angola, Tanzania, Nigeria, Turkey, Tokyo) and a sharp reduction in the Houston office. At the same time, we are decreasing the number of expatriates, whose cost is relatively high. Several other initiatives are underway, and together they shall result in significant cost cuts over time.
We are creating an executive directorship for Digital Transformation, which will be instrumental in the centralization of efforts to modernize our information technology infrastructure, coordinate and strengthen initiatives for the intensive deployment of artificial intelligence. Digital transformation will be a powerful lever for the achievement of productivity gains and cost reduction.
Petrobras University is undergoing a strategic repositioning to become an effective corporate university with activities strictly aligned to our transformational agenda. We are in the stage of signing partnerships with both the University of Chicago Booth School of Business and UFMG's Department of Computer Science for trainings related to leadership, innovation, finance and artificial intelligence.
Our focus in health and safety is bearing fruits. TRI (total recordable injuries frequency rate) has dropped to 0.88, below both the oil and gas industry's average and our own alert limits, while in parallel we are successfully reverting the upward trend in fuel thefts, the so-called underground derivations. After peaking at 261 thefts in 2018, in the first seven months of this year we have a frequency of 174 thefts (in annualized terms), even before the implementation of the Pró-Dutos (Pro-pipes) program.
We are very confident that the rigorous implementation of our transformational agenda has the capacity to eliminate in the future the performance gap that separate us from the best global oil companies and to create substantial value for our shareholders.
Highlights of 2Q19 results:
Adjusted EBITDA of US$ 8.3 billion, 14% higher than 1Q19, reflecting the increase in Brent prices and the appreciation of the dollar against the real, which led to higher oil prices.
The Company posted net income of US$ 4.8 billion, 4.5 times the previous quarter's net income, mainly due to the conclusion of the TAG sale.
Excluding the effects of non-recurring items, the Company's net income would be US$ 1.3 billion and adjusted EBITDA US$ 8.5 billion.
As we expect higher net income for fiscal year 2019, the Board of Directors approved the anticipated distribution to shareholders in the form of interest on equity (JCP) in the amount of R$ 2.6 billion, equivalent to R$ 0.20 per common and preferred share, two times the amount of the previous quarter.
Free cash flow was positive for the seventeenth consecutive quarter, totaling US$ 2.9 billion. This result was due to the improved operating cash flow, for the same reasons that positively impacted EBITDA, and the reduction in investments relative to 1Q19.
In 2Q19, net debt continued its downward trend, ending the quarter at US$ 83.7 billion, a decrease of US$ 11.9 billion compared to 1Q19. In the quarter, we amortized US$ 2.2 billion, and new funding amounted to US$ 488 million only.
In 2Q19, adjusted net debt / LTM Adjusted EBITDA * ratio fell to 2.71 in 1Q19, when applying the effects of IFRS 16 for the whole LTM Adjusted EBITDA period in 2018. If those effects are eliminated, the ratio would have been 1.89 in 2Q19.
In order to reduce risks associated to contingencies, we recognized in 2Q19 expenses amounting to US$ 0.3 billion to settle tax and environmental disputes that totaled a potential exposure of roughly US$ 1.6 billion. These expenses are related to the ICMS tax amnesty program in the states of Bahia and Ceará (expense of US$ 94 million for an exposure of US$ 470 million) and environmental expenses refer to compliance with environmental licensing conditions for Comperj (US$ 207 million expense for an exposure of approximately US$1.2 billion). As a result of the BR Distribuidora's follow-on, we are presenting in this report BR Distribuidora's operations as discontinued operations. For 3Q19, we estimate a pre-tax capital gain of US$ 3.6 billion (including the US$ 1.9 billion remeasurement gain).