Petrobras 2009 Form 20-F Summary
Business context and reporting period
Filed May 19, 2010, this annual report covers Petróleo Brasileiro S.A. (Petrobras) and its wholly owned Cayman Islands subsidiary Petrobras International Finance Company (PifCo) for the fiscal year ended December 31, 2009. The financial statements are presented in U.S. dollars and prepared under U.S. GAAP. Petrobras is an integrated oil and gas company with exploration and production, refining, transportation and marketing, distribution, gas and power, bio-renewables and international operations. PifCo primarily finances and intermediates crude oil and oil-product purchases and sales.
- Petrobras produced 2.329 million barrels of oil equivalent per day on a consolidated basis in 2009, up from 2.226 million boe/d in 2008.
- Brazil accounted for approximately 90% of worldwide production and 95% of worldwide proved reserves on a barrels-of-oil-equivalent basis.
- The Brazilian government owned 55.6% of voting shares and 32.1% of total shares at December 31, 2009.
Key financial metrics
| Petrobras consolidated | 2009 | 2008 | Change |
|---|---|---|---|
| Net operating revenues | US$91.869 billion | US$118.257 billion | Down 22.3% |
| Operating income | US$21.869 billion | US$25.294 billion | Down 13.5% |
| Operating margin | 23.8% | 21.4% | Up approximately 2.4 percentage points |
| Net income attributable to Petrobras | US$15.504 billion | US$18.879 billion | Down 17.9% |
| Net margin | 16.9% | 16.0% | Up approximately 0.9 percentage points |
| Operating cash flow | US$24.920 billion | US$28.220 billion | Down 11.7% |
| Capital expenditures | US$35.134 billion | US$29.874 billion | Up 17.6% |
| Cash and cash equivalents | US$16.169 billion | US$6.499 billion | Up US$9.670 billion |
| Total debt, including current portion | Approximately US$56.702 billion | Approximately US$26.528 billion | Substantial increase |
| Net debt | US$40.963 billion | US$20.624 billion | Up US$20.339 billion |
Petrobras ended 2009 with total assets of US$200.270 billion and total equity of US$95.420 billion. Long-term debt increased to US$48.149 billion from US$20.640 billion. Approximately 51% of total indebtedness, or US$29.047 billion, was floating-rate debt, principally exposing the company to LIBOR, TJLP and CDI movements.
Free cash flow before financing was negative: operating cash flow of US$24.920 billion was less than capital expenditures of US$35.134 billion. Financing activities provided US$16.935 billion, including BNDES funding, PifCo global-note proceeds and China Development Bank financing. Petrobras paid US$7.712 billion in dividends and interest on shareholders’ equity during 2009.
Segment performance and operating developments
| Segment | 2009 net income attributable to Petrobras | 2008 |
|---|---|---|
| Exploration and Production | US$9.683 billion | US$21.031 billion |
| Refining, Transportation and Marketing | US$6.456 billion | Loss of US$1.996 billion |
| Distribution | US$634 million | US$839 million |
| Gas and Power | US$447 million | Loss of US$223 million |
| International | Loss of US$154 million | Loss of US$808 million |
- Exploration and Production earnings declined primarily because Brent averaged approximately US$62.40 per barrel in 2009 versus US$96.99 in 2008, together with a US$1.034 billion Marlim special-participation settlement.
- Downstream earnings improved sharply because international crude and product costs declined faster than domestic gasoline, diesel and LPG prices, expanding refining margins.
- Domestic oil and NGL production increased 6.3% in 2009, while natural gas production available for sale declined 1.9%.
- Brazilian refining capacity was 1.942 million barrels per day, with average throughput of 1.791 million barrels per day and 92% utilization.
- Petrobras invested US$16.488 billion in exploration and production, US$10.466 billion in refining, transportation and marketing, and US$5.116 billion in gas and power.
- Estimated proved reserves at year-end included approximately 10.269 billion barrels of oil, 10.988 trillion cubic feet of natural gas, 6.9 million barrels of synthetic oil and 5.6 billion cubic feet of synthetic gas, consolidated entities only.
PifCo financial profile
| PifCo consolidated | 2009 | 2008 |
|---|---|---|
| Net operating revenue | US$28.850 billion | US$42.443 billion |
| Operating income | US$578 million | Loss of US$927 million |
| Net income | US$487 million | Loss of US$772 million |
| Cash and cash equivalents | US$953 million | US$288 million |
| Long-term debt | US$13.269 billion | US$5.883 billion |
| Stockholder’s deficit | US$79 million | US$593 million |
PifCo’s improved result reflected lower oil prices, lower inventory impairment and reduced freight costs. Its debt-service capacity depends materially on Petrobras, which provides unconditional and irrevocable guarantees for its SEC-registered debt securities.
Material changes versus the prior comparable period
- Revenue and attributable net income declined because of sharply lower oil and gas prices and lower domestic sales volumes.
- Production increased, but capital spending accelerated faster than operating cash generation, resulting in greater reliance on debt financing.
- Cash increased substantially due to financing proceeds, while net debt nearly doubled.
- Petrobras completed or advanced major offshore, gas infrastructure and refining projects, including pre-salt development, LNG terminals and pipeline expansion.
- Proved domestic reserves increased by approximately 13%, primarily from higher oil prices, technical revisions, discoveries and improved recovery. Bolivian proved reserves were removed from year-end 2009 reporting following constitutional changes in Bolivia.
- Petrobras adopted updated SEC and FASB oil and gas reserve disclosure rules; management reported no material effect on reserves, financial position or results.
- Noncontrolling interest was presented within equity under the newly adopted consolidation guidance, with US$1.319 billion of 2009 net income attributable to noncontrolling interests.
Guidance, outlook, risks and unusual items
- The 2009–2013 business plan contemplated US$174.4 billion of capital expenditures, including approximately US$28 billion for pre-salt reservoirs, and targeted production growth of 8.1% annually.
- For 2010–2014, the board authorized capital expenditures of US$200–US$220 billion, subject to completion of management’s business-plan review. The board also set a maximum net-debt-to-equity ratio of 35% and net-debt-to-EBITDA ratio of 2.5:1.
- Management expected 2010 funding to include equity issuance, cash balances, new debt, existing facilities and China Development Bank financing. The filing does not provide a final equity issuance size or definitive 2010–2014 plan.
- Major risks include oil-price volatility, refining-margin compression, exchange-rate movements, floating-rate debt, high pre-salt development costs, reserve-estimation uncertainty, environmental liabilities, political and regulatory intervention, and dependence on Brazilian government approvals and budgets.
- Petrobras had US$500 million accrued for litigation contingencies, while total claims, excluding matters not readily measurable, were estimated at approximately US$28.4 billion. Significant possible exposures included tax assessments, environmental claims and the Porto Seguro petrochemical litigation.
- Petrobras was not insured for business interruption in its Brazilian operations and generally lacked war or sabotage coverage for most assets.
- Unusual 2009 items included the US$1.034 billion Marlim settlement, a US$147 million Pasadena refinery-related loss, US$319 million of impairment charges, and US$308 million of inventory write-downs.
- Subsequent developments included the Braskem–Quattor consolidation, additional China Development Bank funding, planned investments in ethanol producer Guarani and continued legislative proposals concerning pre-salt production-sharing arrangements and a possible capitalization.
Most important facts for investors to verify
- Reconcile net debt, total debt and cash balances between Petrobras consolidated statements and the separate PifCo financial statements.
- Assess whether the proposed US$200–US$220 billion 2010–2014 investment program can be funded while maintaining the stated leverage limits.
- Review the sensitivity of earnings and cash flow to Brent prices, domestic fuel pricing policy, refining margins, the Brazilian real and floating interest rates.
- Evaluate the commercial timing, cost assumptions and reserve-booking prospects for pre-salt projects, including the substantial proved-undeveloped reserve base.
- Review the complete legal-proceedings disclosures, including unprovided possible losses and the approximately US$28.4 billion aggregate claims estimate.
- Confirm the final terms and dilution implications of any Petrobras equity issuance or government capitalization associated with a transfer of pre-salt rights.
- Verify PifCo’s guaranteed debt, refinancing requirements and dependence on Petrobras for liquidity and debt service.
- Consider the effect of the Brazilian government’s controlling ownership and its ability to influence pricing, investment, financing and regulatory decisions.