Petrobras 2010 Form 20-F Summary
Business context and reporting period
Petrobras is Brazil’s state-controlled integrated oil and gas company, with exploration and production, refining, transportation and marketing, distribution, gas and power, biofuels, petrochemicals and international operations. The filing, dated May 25, 2011, covers the fiscal year ended December 31, 2010, rather than a standalone quarterly period. Petrobras and wholly owned finance subsidiary Petrobras International Finance Company (PifCo) report under U.S. GAAP in U.S. dollars.
Brazilian federal government ownership was 63.6% of voting shares and 48.3% of total capital at December 31, 2010. Petrobras completed a global share offering in September–October 2010 that generated approximately $70 billion in gross proceeds and issued approximately 2.37 billion common and 1.90 billion preferred shares, including the over-allotment.
Key financial metrics
| Petrobras consolidated metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net operating revenues | $120.052 billion | $91.869 billion | 30.7% |
| Operating income | $24.158 billion | $21.869 billion | 10.5% |
| Operating margin | 20.1% | 23.8% | Down |
| Net income attributable to Petrobras | $19.184 billion | $15.504 billion | 23.7% |
| Net margin | 16.0% | 16.9% | Down |
| Operating cash flow | $28.495 billion | $24.920 billion | 14.4% |
| Capital expenditures | $45.078 billion | $35.134 billion | 28.3% |
| Cash and cash equivalents | $17.633 billion | $16.169 billion | 9.1% |
| Net debt | $36.701 billion | $41.733 billion | Down 12.1% |
| Total long-term debt | $60.471 billion | $49.041 billion | 23.3% |
| Total assets | $308.683 billion | $200.270 billion | 54.1% |
Operating cash flow funded approximately 63% of capital expenditures. Financing cash flow was $35.386 billion, primarily reflecting the share offering, new debt and $5.299 billion of dividends and shareholder interest paid. Petrobras had $8.960 billion of current debt and $60.471 billion of long-term debt at year-end. Approximately 60.3% of total indebtedness, or $41.462 billion, was floating-rate debt, principally exposed to LIBOR, CDI and TJLP.
Petrobras’ 2010 production averaged approximately 2.405 million barrels of oil equivalent per day worldwide, including 2.166 million boe per day in Brazil. Domestic proved reserves were reported at 12.14 billion boe, with Brazil representing approximately 95% of worldwide reserves on a boe basis. Domestic oil production increased modestly, while higher oil prices and the stronger Brazilian real supported reported dollar revenue and earnings.
Segment performance and material changes
- Exploration and Production: Net income rose to $16.351 billion from $9.683 billion, driven by higher crude prices, slightly higher production and lower legal-related charges. Capital expenditures increased to $22.222 billion.
- Refining, Transportation and Marketing: Net income fell to $1.539 billion from $6.563 billion. Higher crude acquisition and imported-product costs, increased refinery expenses and lagging domestic gasoline, diesel and LPG prices compressed margins. Domestic oil-product sales volumes increased 10.7%.
- Distribution: Net income increased to $727 million from $634 million, supported by higher sales volumes and margins. BR held approximately 38.8% of Brazil’s fuel distribution market.
- Gas and Power: Net income increased to $734 million from $340 million, reflecting higher gas and thermoelectric demand and fixed power-auction revenue, partly offset by higher LNG and Bolivian gas costs.
- International: Net income improved to $799 million from a $154 million loss, primarily due to higher commodity prices and increased production, including Nigeria’s Akpo field.
- PifCo: Revenue increased 20.5% to $34.759 billion, but PifCo reported a $262 million net loss versus $487 million of net income in 2009. The transition from payment terms of up to 330 days to approximately 30 days reduced financing income. PifCo had $1.197 billion of cash, $2.633 billion of current debt, $12.431 billion of long-term debt and a $342 million stockholder deficit.
The filing identifies several unusual or material items, including a $402 million impairment charge, a $412 million loss related to the exchange of equity-method investments in Braskem, $275 million of non-recurring project-financing expenses, higher pension obligations, and a $1.034 billion Marlim special-participation charge recognized in 2009 that did not recur in 2010.
Strategy, outlook and guidance
Petrobras’ 2010–2014 Business Plan contemplated $224 billion of capital expenditures, including $118.8 billion for exploration and production and $33 billion for pre-salt concessions existing before the Assignment Agreement. The 2011 capital expenditure budget was $54 billion. Management targeted production growth of 9.4% annually from 2010 through 2014, subject to execution, financing, equipment availability, licensing and market conditions.
The company targeted a net-debt-to-equity ratio of 25%–35% and a net-debt-to-EBITDA ratio no higher than 2.5:1. The 2011–2015 business plan was still under review by the board at the filing date. Petrobras expected to fund 2011 needs through operating cash flow, year-end cash, existing credit facilities and additional debt. As of May 10, 2011, it had raised $6.0 billion through a PifCo global-note offering and $620.5 million through credit lines and export-credit agencies.
The September 2010 Assignment Agreement granted Petrobras exploration and production rights in specified pre-salt areas for up to five billion boe, for an initial price of approximately $42.533 billion and a term of 40 years, subject to revision. The subsequent revision may require an additional payment to the Brazilian government, reduce the assigned volume, or result in a payment to Petrobras. All exploration and production costs and risks remain with Petrobras.
Risks, contingencies and unusual items
- Deepwater and ultra-deepwater operations carry significant drilling, blowout, spill, environmental, safety, equipment and execution risks. Petrobras does not maintain business-interruption coverage for its Brazilian operations and does not have control-of-well insurance for domestic operations.
- Oil, gas and refining-margin volatility, Brazilian real exchange-rate movements and higher interest rates could materially affect cash flow, margins, debt service and reserve values. Petrobras did not hedge its interest-rate exposure.
- Pre-salt development requires substantial capital, infrastructure, qualified personnel and offshore services, while Brazilian-content requirements may increase costs or cause delays.
- The Brazilian federal government controls the investment budget and long-term debt limits and may pursue social or macroeconomic objectives through Petrobras, including domestic supply and pricing policies.
- Petrobras recorded $760 million of litigation provisions at year-end and estimated total claims of approximately $38.7 billion, excluding claims that could not readily be evaluated. Major possible exposures include tax assessments, environmental claims and a Petroquisa shareholder action with an estimated potential gross award of $11.422 billion, partly eliminated on consolidation.
- Petros pension and health-care obligations totaled approximately $14.522 billion on the balance sheet, including $8.268 billion for health-care benefits. The Petros pension plan liability increased substantially, partly because of a lower discount rate.
- 2010 oil spills totaled 176,388 gallons, up from 67,102 gallons in 2009. Environmental remediation, licensing and regulatory requirements may require additional expenditures and could restrict operations.
- On January 27, 2011, PifCo issued $6.0 billion of global notes due 2016, 2021 and 2041. Petrobras unconditionally and irrevocably guaranteed the notes, increasing Petrobras’ contingent credit exposure to PifCo.
- After year-end, the ANP notified Petrobras of potential additional special-participation charges relating to several Campos Basin fields totaling R$365 million before fines and interest; Petrobras contested the notification.
Important facts for investors to verify
- Reconcile the reported 2010 reserve figures under SEC rules with the materially different reserve figures filed with Brazil’s ANP and assess the effect of price assumptions and booking criteria.
- Monitor the Assignment Agreement revision, including the final price and volume determination, potential additional payments or volume reductions, and development milestones for the transferred pre-salt areas.
- Assess whether the $54 billion 2011 capital budget and longer-term production-growth targets are achievable without materially exceeding leverage targets.
- Review downstream pricing policy, import costs and refining margins, particularly because domestic fuel prices may not adjust promptly to international oil-price changes.
- Evaluate Petrobras’ floating-rate and foreign-currency debt exposure, refinancing needs and the effect of Brazilian government budget approvals.
- Review the status and provisioning of major litigation, tax assessments, environmental proceedings and pension obligations, including possible losses not accrued.
- Confirm PifCo’s transition from trading subsidiary to finance vehicle and Petrobras’ continuing guarantees of PifCo debt.
- Consider the impact of the 2010 share issuance on per-share results, ownership dilution, dividends and government control.