Petrobras 2018 Form 20-F Summary
Business context and reporting period
Petrobras is a Brazilian state-controlled integrated oil and gas company operating primarily in exploration and production, refining, transportation and marketing, gas and power, distribution, and biofuels. This Form 20-F reports the fiscal year ended December 31, 2018, with comparative IFRS information for 2017 and 2016. The filing is an annual report rather than a quarterly filing.
Financial statements are presented in U.S. dollars and prepared under IFRS as issued by the IASB. Petrobras’ functional currency is principally the Brazilian real. The Brazilian federal government owned 50.26% of voting shares and 28.67% of total outstanding shares at year-end.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales revenue | US$95.584 billion | US$88.827 billion | +8% |
| Operating income | US$17.432 billion | US$11.219 billion | +55% |
| Operating margin | 18.2% | 12.6% | Improved |
| Net income attributable to Petrobras shareholders | US$7.173 billion | US$(91) million | Returned to profit |
| Net margin attributable to shareholders | 7.5% | Negative | Improved materially |
| Net finance expense | US$5.857 billion | US$9.895 billion | Down 41% |
| Impairment of assets | US$2.005 billion | US$1.191 billion | Up 68% |
| Net cash from operating activities | US$26.353 billion | US$27.112 billion | Down 3% |
| Free cash flow | US$15.096 billion | US$13.850 billion | Up 9% |
| Capital expenditures under plan methodology | US$13.439 billion | US$15.084 billion | Down 11% |
| Gross debt | US$84.360 billion | US$109.275 billion | Down 23% |
| Net debt | US$69.378 billion | US$84.871 billion | Down 18% |
Cash and cash equivalents were US$13.899 billion, and marketable securities were US$1.083 billion, producing reported liquidity of US$14.982 billion versus US$24.404 billion in 2017. Short-term debt was US$3.667 billion and non-current finance debt was US$80.508 billion. Foreign-currency debt represented 81% of total financial debt, including 74% denominated in U.S. dollars. Approximately 50% of total debt was floating rate.
The net debt-to-adjusted EBITDA ratio declined to 2.20 in U.S. dollars from 3.53 in 2017 and to 2.34 in Brazilian reais from 3.67. The company reported no material off-balance-sheet arrangements.
Operations and material changes
- Total oil and gas production, including NGL, was 2.63 million boe/d, including 2.53 million boe/d in Brazil. Brazilian oil production attributable to Petrobras averaged 2.035 million barrels/d, down from 2.154 million barrels/d in 2017.
- Pre-salt production reached 1.75 million boe/d and benefited from four new production systems: P-74, P-75, P-69 and the Cidade de Campos dos Goytacazes FPSO.
- Average Brazilian lifting cost excluding government fees declined to US$10.7/boe from US$11.0/boe.
- Proved reserves under SEC criteria totaled 9.606 billion boe, down 1.5% from 9.752 billion boe. The reserve replacement ratio excluding acquisitions and divestments was 125%, and the reserves-to-production ratio was 11.1 years.
- Domestic refining throughput was 1.715 million barrels/d, down from 1.736 million barrels/d. Domestic oil-product sales declined 3% to 1.887 million barrels/d, while higher prices and exports supported revenue.
- Exploration and Production generated US$12.190 billion of net income, up 74%. Refining, Transportation and Marketing generated US$2.393 billion, down 43%; Gas and Power generated US$480 million, down 75%; and Distribution generated US$344 million, down 34%.
- Partnerships and divestments generated approximately US$6.0 billion of cash inflows in 2018. Significant transactions included interests transferred to Total and Equinor, the Gulf of Mexico joint venture with Murphy, and the sale of petrochemical assets.
- The company reduced its workforce to 63,361 employees from 62,703 in 2017 and reported estimated cumulative savings of approximately US$5 billion from voluntary separation programs since inception.
Guidance, outlook, risks and unusual items
Petrobras’ 2019-2023 Business Plan includes US$84.1 billion of planned investment, with 82% allocated to Exploration and Production. Management targeted net debt-to-adjusted EBITDA below 1.5 by 2020, ROCE above 11% by 2020, and a total recordable injury frequency rate below 1.0 in 2019. The plan assumes Brent prices of US$66 per barrel in 2019, rising to US$75 per barrel in 2022-2023.
For 2019, management expected Brazilian oil production of approximately 2.3 million barrels/d, 10% above the 2018 average. A March 2019 Resilience Plan targeted US$8.1 billion of manageable operating-cost reductions over 2019-2023 and expanded the planned portfolio-management program without changing the investment program.
Unusual 2018 items included US$853.2 million recorded for settlement of the SEC and Department of Justice investigations, US$2.005 billion of impairment charges, US$2.040 billion of losses related to legal, administrative and arbitration proceedings, and US$1.415 billion of revenue from the Brazilian diesel-price subsidy program. Petrobras also recognized US$1.418 billion of finance income related principally to agreements with Eletrobras group companies and privatization-related recoveries.
- The U.S. securities class-action settlement requires total payments of US$2.950 billion. Two installments were paid in 2018 and the final US$984 million installment was deposited in January 2019; an appeal remained pending at the filing date.
- The Lava Jato investigation remains a material legal and reputational risk despite settlement of the SEC and DOJ inquiries. Petrobras reported US$912 million of cumulative recoveries from the investigation through December 2018.
- Contingent liabilities for which loss was not considered remote totaled US$56.669 billion, including US$37.290 billion of tax matters, US$8.619 billion of labor matters, US$6.539 billion of general civil matters and US$4.221 billion of environmental matters.
- Recognized provisions for legal proceedings totaled US$7.405 billion. Material matters included the Parque das Baleias unitization dispute, the Vantage drilling arbitration and labor claims involving the RMNR compensation methodology.
- Petros and AMS post-employment obligations totaled US$22.750 billion, with plan assets of US$12.655 billion. The company’s broader contractual-obligations table excluded US$35.405 billion of pension and medical obligations.
- The Assignment Agreement with the Brazilian federal government remains under review. Depending on the outcome, Petrobras could owe an additional payment or receive compensation; the filing states that no final amount was clear at year-end.
- IFRS 16 became effective January 1, 2019. Petrobras estimated increases of approximately US$28 billion in PP&E and finance debt upon initial adoption, with no expected initial effect on equity.
- Petrobras does not generally maintain business-interruption insurance for Brazilian operations and does not insure most assets against war or sabotage. Key exposures include oil-price volatility, exchange rates, interest rates, environmental incidents, regulatory actions, political intervention and project execution.
Most important facts for investors to verify
- Reconcile the reported 2018 net income, operating income, adjusted EBITDA and free cash flow to the audited IFRS financial statements and distinguish recurring performance from settlements, subsidies, recoveries and divestment gains.
- Review debt maturities, refinancing needs and the effect of foreign-currency and floating-rate exposure, particularly the US$58 billion of debt obligations including interest stated as maturing within five years.
- Assess whether planned divestments can be completed on schedule and at expected values, given Brazilian judicial and regulatory challenges.
- Evaluate the sustainability of production growth from the pre-salt against reserve depletion, decommissioning obligations, capital requirements and environmental licensing.
- Monitor the Assignment Agreement revision, Eletrobras receivables, Petros and AMS funding requirements, and the principal legal and arbitration proceedings.
- Confirm the impact of IFRS 16 adoption on 2019 leverage metrics and debt covenants.
- Consider the effect of Petrobras’ state ownership and Brazilian government pricing, investment, regulatory and public-interest directives on shareholder returns.