Business context and reporting period
Petrobras is a Brazilian state-controlled integrated energy company focused on exploration and production, refining, transportation and marketing, gas and power, petrochemicals and selected biofuels activities. This Form 20-F reports the fiscal year ended December 31, 2019, under IFRS as issued by the IASB, with amounts presented in U.S. dollars. The filing does not provide a clear standalone fourth-quarter 2019 income statement; the figures below are primarily full-year amounts.
Operations were increasingly concentrated in Brazilian deepwater and ultra-deepwater assets. Brazil represented 98% of global oil production and 99% of proved oil and gas reserves. Pre-salt production was the principal growth driver.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales revenue | US$76.6 billion | US$84.6 billion | Down 10% |
| Gross profit | US$30.9 billion | US$32.5 billion | Down 5% |
| Gross margin | 40.3% | 38.3% | Up approximately 2.0 points |
| Operating income | US$20.6 billion | US$16.8 billion | Up 23% |
| Operating margin | 26.9% | 19.8% | Up approximately 7.1 points |
| Net income attributable to Petrobras shareholders | US$10.2 billion | US$7.2 billion | Up 42% |
| Net margin | 13.3% | 8.5% | Up approximately 4.8 points |
| Net cash from operating activities | US$25.6 billion | US$26.4 billion | Down 3% |
| Free cash flow | US$18.4 billion | US$15.2 billion | Up 21% |
| Adjusted EBITDA | US$32.7 billion | US$31.5 billion | Up 4% |
| Capital expenditures | US$27.4 billion | US$13.4 billion | Approximately doubled |
| Gross debt, including IFRS 16 leases | US$87.1 billion | US$84.4 billion | Higher primarily from IFRS 16 |
| Net debt, including IFRS 16 leases | US$78.9 billion | US$69.4 billion | Higher primarily from IFRS 16 |
| Cash and cash equivalents | US$7.4 billion | US$13.9 billion | Down 47% |
Excluding the effects of IFRS 16, net debt declined to approximately US$55.2 billion from US$69.4 billion, and the net debt-to-adjusted EBITDA ratio declined to 1.95x from 2.20x. Reported 2019 net debt-to-adjusted EBITDA was 2.41x, compared with 2.20x in 2018.
- Total oil and gas production increased 5.4% to 2.77 million barrels of oil equivalent per day; Brazilian production increased 6.4% to 2.69 million barrels of oil equivalent per day.
- Brazilian oil production increased 6.7% to 2.17 million barrels per day, while pre-salt oil production increased 28.5% to 1.28 million barrels per day.
- Average lifting cost excluding government fees decreased 11% to US$9.5 per barrel of oil equivalent.
- Net proved reserves were 9.59 billion barrels of oil equivalent, down modestly from 9.61 billion at year-end 2018. The company incorporated 943.7 million barrels of oil equivalent through revisions, extensions and discoveries, offset by production and reserve sales.
- Segment net income attributable to shareholders was US$12.6 billion for Exploration and Production, US$1.0 billion for Refining, Transportation and Marketing, US$4.2 billion for Gas and Power, and negative US$6.3 billion for Corporate and Other Businesses.
Material changes versus the prior comparable period
- Revenue declined because of lower oil and oil-product prices in U.S. dollars, lower domestic gasoline and diesel sales, lower electricity revenue and divestments of overseas operations. Higher crude oil and oil-product exports partly offset these effects.
- Operating income and net income improved despite lower Brent prices, primarily because of divestment gains, higher production, lower lifting costs and lower legal contingencies. The 2019 result included US$6.0 billion of gains on asset disposals and remeasurements, compared with US$0.4 billion in 2018.
- Net income from discontinued operations increased to US$2.6 billion from US$0.8 billion, principally because of the gain on the July 2019 follow-on offering of Petrobras Distribuidora. Petrobras reduced its ownership to 37.5% and began accounting for BR Distribuidora as an associate.
- Finance expense increased to US$8.8 billion from US$6.5 billion, including US$1.5 billion of lease-liability discount unwinding following IFRS 16 adoption. Lower average finance debt partly offset this increase.
- Impairment expense increased to US$2.8 billion from US$2.0 billion, principally affecting E&P and refining assets because of lower projected oil prices, revised decommissioning assumptions and delayed or discontinued projects.
- Petrobras sold 90% of TAG, its controlling interest in BR Distribuidora, Pasadena refining operations, several producing fields and other assets. These transactions generated approximately US$10.4 billion of 2019 disposal proceeds.
- The company received approximately US$8.4 billion in December 2019 under the amended Transfer of Rights Agreement and paid US$15.3 billion for surplus production rights in the Búzios field and US$429 million for Itapu rights.
- IFRS 16 added US$26.6 billion of right-of-use assets and lease liabilities at January 1, 2019, changing the presentation of leverage, depreciation, finance expense and cash flows without affecting initial equity.
Guidance, outlook, commentary and risks
The 2020-2024 Strategic Plan prioritizes pre-salt exploration and production, portfolio divestments, cost reduction, debt reduction, digital transformation and capital discipline. Planned capital expenditures are US$75.7 billion, with 85% allocated to Exploration and Production and 59% of E&P investment directed to pre-salt assets. Management expects 13 new production systems to start during 2020-2024.
- 2020 planned capital expenditures were approximately US$12 billion, with approximately US$6.8 billion of scheduled debt principal and interest payments.
- Planned divestments for 2020-2024 were estimated at US$20-30 billion, concentrated in 2020 and 2021. Management targeted a net debt-to-adjusted EBITDA ratio of 1.5x in 2020 and stated that it did not expect net new financing over the plan horizon.
- Plan assumptions included average Brent of US$65 per barrel and an average exchange rate of R$3.93 per U.S. dollar. The 2020 production target included a plus-or-minus 2.5% range.
- Management committed to cost optimization, including a 10% cost-reduction target and a 15% reduction in corporate spending in 2020, subject to execution and market conditions.
- Material risks include crude oil and refining-margin volatility, COVID-19 and related demand and supply-chain disruption, Brazilian real depreciation, floating-rate and foreign-currency debt exposure, refinancing and liquidity risk, delays or failures in asset divestments, environmental incidents, decommissioning costs, pension and medical obligations, regulatory and antitrust actions, and continuing Lava Jato-related litigation.
- As of March 18, 2020, management reported a 26.8% depreciation of the Brazilian real against the U.S. dollar from year-end 2019 and stated that it had requested approximately US$8 billion of revolving credit-line disbursements to protect liquidity amid COVID-19 and oil-price volatility.
- Unusual items include a US$740 million 2019 provision related to Sete Brasil proceedings, a US$155 million environmental provision related to the OSPAR pipeline, a US$208 million COMPERJ conduct-adjustment obligation and a US$700 million payment related to the Vantage drilling arbitration.
Most important facts for an investor to verify
- Reconcile reported leverage with and without IFRS 16 and assess the effect of lease liabilities on debt-service capacity.
- Evaluate whether divestment proceeds, including the TAG and BR Distribuidora transactions, are recurring sources of cash or largely non-recurring gains.
- Review the 2020-2024 production schedule, pre-salt project execution, lifting-cost trajectory and reserve replacement assumptions.
- Assess liquidity against the disclosed debt maturities, lease commitments, natural-gas take-or-pay obligations and decommissioning liabilities.
- Review exposure to oil prices, refining margins, the Brazilian real, floating interest rates and potential COVID-19 effects on demand and operations.
- Examine the US$26.5 billion of pension and medical obligations, the proposed Petros deficit plan and related future cash contributions.
- Review the US$49.7 billion of disclosed contingent legal liabilities, including tax, labor, civil and environmental matters, and the uncertainty surrounding investor claims related to Lava Jato.
- Verify the status and economics of pending divestments, CADE commitments to sell refining and gas assets, and any required regulatory or judicial approvals.