Petrobras 2017 Form 20-F Summary
Business context and reporting period
Petróleo Brasileiro S.A.—Petrobras filed its annual report on Form 20-F for the fiscal year ended December 31, 2017. The consolidated financial statements are presented in U.S. dollars and prepared under IFRS as issued by the IASB. Petrobras is Brazil’s state-controlled integrated oil and gas company, with operations concentrated in exploration and production, refining, transportation and marketing, gas and power, distribution and biofuels.
The Brazilian federal government owned 50.26% of voting shares and 28.67% of total outstanding shares at year-end. Petrobras’ primary strategic focus is deepwater and pre-salt exploration and production in Brazil, while reducing leverage through operating efficiencies, partnerships and divestments.
Key financial and operating metrics
| Metric | 2017 | 2016 | Change or commentary |
|---|---|---|---|
| Sales revenue | US$88.827 billion | US$81.405 billion | Up 9% |
| Gross profit | US$28.680 billion | US$25.988 billion | Gross margin approximately 32.3%, versus 31.9% |
| Operating income | US$11.219 billion | US$4.308 billion | Operating margin approximately 12.6%, versus 5.3% |
| Net income attributable to Petrobras shareholders | Loss of US$91 million | Loss of US$4.838 billion | Material improvement, but still a loss |
| Net income | US$169 million | Loss of US$4.349 billion | Improved to modest consolidated profit |
| Net finance expense | US$9.895 billion | US$7.755 billion | Up 28% |
| Impairment charges | US$1.191 billion | US$6.193 billion | Down 81% |
| Cash flow from operating activities | US$27.112 billion | US$26.114 billion | Up 4% |
| Capital expenditures in cash flow statement | US$13.639 billion | US$14.085 billion | Down 3% |
| Plan-based capital expenditures | US$15.084 billion | US$15.859 billion | Down 5%; differs from IFRS cash-flow capital expenditures |
| Cash and cash equivalents | US$22.519 billion | US$21.205 billion | Up 6% |
| Liquidity cushion | US$24.404 billion | US$21.989 billion | Cash plus marketable securities and qualifying deposits |
| Gross debt | US$109.275 billion | US$118.370 billion | Down 8% |
| Net debt | US$84.871 billion | US$96.381 billion | Down 12% |
| Net debt/adjusted EBITDA | 3.53x in U.S. dollars; 3.67x in reais | 3.76x in U.S. dollars; 3.54x in reais | Improved in dollars; increased in reais due mainly to the class-action provision |
| Domestic oil production | 2.15 million barrels per day | 2.14 million barrels per day | Up 0.4% |
| Worldwide oil and gas production | 2.52 million boe per day | 2.55 million boe per day | Down 1.1%, primarily from international divestments |
| Proved reserves | 9.752 billion boe | 9.672 billion boe | Up 0.8%; reserve replacement ratio was 109% |
Revenue growth reflected higher crude oil prices, increased exports, higher domestic electricity and natural gas revenue, and the real’s appreciation when translating Brazilian results into U.S. dollars. These benefits were partly offset by lower domestic fuel sales volumes and reduced international operations following divestments.
Cash flow from operations exceeded capital expenditures, producing positive free cash flow before financing. However, free cash flow was not sufficient to cover total debt principal and interest payments. Financing proceeds were US$27.075 billion, while principal and interest payments were US$43.076 billion.
Approximately 80% of financial debt was denominated in foreign currencies, including 73% in U.S. dollars, and approximately 49% of total indebtedness was floating rate. Non-current finance debt was US$102.045 billion and short-term debt was US$7.001 billion at December 31, 2017.
Material changes versus the prior comparable period
- Operating performance improved substantially: operating income increased from US$4.308 billion to US$11.219 billion and the shareholder loss narrowed from US$4.838 billion to US$91 million.
- Higher Brent prices, improved domestic pricing discipline and increased electricity dispatch supported revenue and operating results. Average Brent increased to US$54.35 per barrel from US$44.11.
- Exploration and Production net income increased to US$7.021 billion from US$1.425 billion, supported by higher prices and lower depreciation and impairment expense.
- Gas and Power net income increased to US$1.915 billion from US$732 million, aided by higher natural gas sales, higher prices, increased domestic gas in the sales mix and the NTS transaction.
- Distribution net income increased to US$521 million from US$67 million, while Refining, Transportation and Marketing net income declined to US$4.235 billion from US$5.746 billion because of lower domestic sales volumes and margins.
- Domestic oil-products sales declined 6% to 1.940 million barrels per day, principally because of lower market share in diesel and gasoline.
- Petrobras completed or advanced significant divestments, including the sale of 90% of NTS, the sale of Petrobras Chile Distribución and the 28.75% secondary offering of Petrobras Distribuidora. Proceeds from 2017 and early 2018 divestments totaled approximately US$8.9 billion.
- Management reported that prior material weaknesses in internal control over financial reporting were remediated, and both management and KPMG concluded controls were effective as of December 31, 2017.
Guidance, outlook, commentary and unusual items
- The 2018-2022 Plan targets a net debt/adjusted EBITDA ratio of 2.5x in 2018, calculated in reais, and convergence toward the leverage of major investment-grade oil and gas companies by 2022.
- Management expected 2018 Brazilian oil production of approximately 2.1 million barrels per day, broadly in line with 2017. Six additional FPSOs were planned for the Búzios and Lula fields, with other systems scheduled for Tartaruga Verde, Berbigão and Atapu.
- Planned 2018-2022 capital expenditures were US$74.5 billion, including US$60.3 billion for exploration and production. The plan assumes Brent prices of approximately US$53 per barrel in 2018, US$58 in 2019, US$66 in 2020, US$70 in 2021 and US$73 in 2022.
- The company planned to receive approximately US$21 billion from partnerships and divestments during 2017-2018. Execution remains subject to market conditions, regulatory approvals, judicial challenges and transaction counterparties.
- Petrobras recognized a US$3.449 billion provision in 2017 for the proposed U.S. securities class-action settlement, including tax gross-up. The agreed settlement amount was US$2.950 billion and remained subject to final court approval at the filing date.
- Petrobras recorded US$2.436 billion of after-tax income-statement effects from Brazilian tax settlement programs, including PERT, PRD and the settlement program under Law 13.586/2017.
- Petros pension-plan deficit equalization began in 2018. Petrobras expected to fund approximately US$4.1 billion over 18 years, with an estimated first-year contribution of approximately US$450 million. Consolidated pension and medical liabilities were US$21.830 billion at year-end.
- Petrobras continued to cooperate with ongoing SEC and U.S. Department of Justice investigations related to the Lava Jato corruption matter. Management could not reliably estimate potential penalties or other financial relief.
- Key operational and market risks include crude oil and refining-price volatility, Brazilian real depreciation, interest-rate increases, refinancing risk, environmental incidents, regulatory changes, production delays, supplier failures, litigation, pension obligations and government influence over pricing or investment decisions.
- No dividends were paid or proposed for 2017 because Petrobras reported a shareholder loss.
Most important facts for an investor to verify
- Reconcile the reported operating cash flow: the MD&A reports US$27.112 billion, while one financial-statement note refers to US$27.708 billion in a funding discussion.
- Confirm the final approval, payment schedule and ultimate cash impact of the US$2.950 billion U.S. class-action settlement.
- Monitor the ongoing SEC and DOJ investigations and any further Lava Jato-related claims, settlements or penalties.
- Assess whether the US$21 billion divestment target is achieved and whether delayed or cancelled transactions affect liquidity and leverage targets.
- Review debt maturities, currency composition, floating-rate exposure and refinancing requirements; 48% of principal, or approximately US$53 billion, was scheduled to mature within five years.
- Track execution of the 2018 production program, FPSO start-ups, pre-salt reserve replacement and lifting-cost trends.
- Evaluate sensitivity to Brent prices, the Brazilian real, refining margins and Brazilian domestic fuel market share.
- Review Petros deficit contributions, medical-plan changes and the potential effect of future actuarial revisions.
- Review the unresolved Assignment Agreement price and volume revision with the Brazilian federal government, which could result in additional payment or a reduction in assigned production rights.
- Consider the substantial disclosed contingent liabilities, including US$58.314 billion of tax, labor, civil and environmental claims for which loss was considered possible or not remote.