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, and related businesses. The filing is an audited Form 20-F for the fiscal year ended December 31, 2020, rather than a standalone quarterly filing. Financial statements are presented in U.S. dollars and prepared under IFRS as issued by the IASB.
Operations remain concentrated in Brazil, particularly deepwater and ultra-deepwater pre-salt assets. Brazil accounted for 99% of global oil production and 99.7% of proved oil and gas reserves. The Brazilian federal government controlled a majority of voting shares and retained the ability to appoint a majority of the Board.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Sales revenues | US$53.7 billion | US$76.6 billion | Down 29.9% |
| Gross profit | US$24.5 billion | US$30.9 billion | Down 20.6% |
| Operating income | US$10.1 billion | US$20.6 billion | Down 51.2% |
| Net income attributable to Petrobras shareholders | US$1.1 billion | US$10.2 billion | Down 88.8% |
| Net income | US$0.9 billion | US$10.4 billion | Down 90.9% |
| Net cash from operating activities | US$28.9 billion | US$25.6 billion | Up 12.9% |
| Free cash flow | US$22.1 billion | US$18.4 billion | Up 20.1% |
| Adjusted EBITDA | US$28.4 billion | US$32.7 billion | Down 13.2% |
| Capital expenditures | US$8.1 billion | US$27.4 billion | Down 70.6% |
Calculated margins were approximately 45.6% gross, 18.7% operating and 2.1% net attributable to shareholders. Net finance expense increased to US$9.6 billion from US$8.8 billion, reflecting foreign-exchange effects, hedge-accounting expense and debt-repurchase premiums.
- Total oil and gas production was 2.836 million barrels of oil equivalent per day, up 2.4% from 2019. Brazilian production increased 3.7% to 2.788 million boed, while international production declined 41.5% to 48 thousand boed.
- Pre-salt oil production increased 21.1% to 1.546 million barrels per day and represented 68% of Brazilian oil production.
- Average Brent pricing fell to approximately US$42 per barrel from US$64 per barrel in 2019. The average Petrobras oil and NGL sales price declined to US$39.95 per barrel from US$61.25.
- Oil product sales volumes declined, particularly diesel, gasoline and jet fuel, while exports increased. Net exports reached 743 thousand barrels per day.
- Cash and cash equivalents were US$11.7 billion, with marketable securities of US$0.7 billion. Management also reported adjusted cash and cash equivalents of approximately US$12.4 billion under its non-GAAP definition.
- Gross debt, including lease liabilities, was US$75.5 billion, down from US$87.1 billion. Net debt was US$63.2 billion, down from US$78.9 billion, and net debt to adjusted EBITDA improved to 2.22x from 2.41x.
- Finance debt was US$53.9 billion, including US$4.2 billion due within one year. Lease liabilities were US$21.7 billion. Approximately 84.9% of financial debt was denominated in currencies other than the Brazilian real and 41.9% was floating-rate debt.
- The company proposed US$2.0 billion of distributions for 2020, including US$0.849 billion relating to the minimum mandatory dividend for preferred shareholders and US$1.128 billion of additional dividends for common shareholders.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability deteriorated primarily because of the COVID-19 demand shock, lower Brent prices, weaker domestic fuel demand and lower refining margins.
- Operating cash flow and free cash flow increased despite lower earnings, supported by higher exports, working-capital management, tax credits, cost reductions and lower capital spending.
- Impairment charges increased to US$7.3 billion from US$2.8 billion, principally affecting E&P assets. The company recorded US$7.1 billion of impairment on producing properties in Brazil, partly reflecting lower oil-price assumptions, currency depreciation, field hibernation and reduced demand.
- General and administrative expenses fell 48.7% to US$1.1 billion, while selling expenses rose 9.1% to US$4.9 billion due to higher export volumes, freight costs and third-party pipeline tariffs following the TAG divestment.
- Capital expenditures were sharply reduced to preserve liquidity, with approximately 81% allocated to E&P. The company also mothballed 63 shallow-water platforms and reduced or postponed selected projects.
- Petrobras completed or advanced divestments including its remaining TAG interest, Liquigás, several E&P assets and its interest in Petrobras Oil & Gas B.V. Aggregate transaction values for completed divestitures from January 2020 through March 12, 2021 totaled approximately US$3.8 billion.
- Proved reserves declined to 8.816 billion boe from 9.590 billion boe. Technical revisions and project approvals added reserves, but economic revisions related primarily to lower oil prices reduced reserves by approximately 667 million boe.
Guidance, Outlook, Management Commentary and Risks
- The 2021-2025 Strategic Plan projects US$55 billion of capital expenditures, including US$46 billion for E&P and US$32 billion for pre-salt assets. Management expects 13 new production systems during the period.
- Planned 2021 capital expenditures were approximately US$10 billion, with about US$6 billion of principal and interest payments. Planned divestitures for 2021-2025 were estimated at US$25 billion to US$35 billion.
- Management targeted gross debt of US$67 billion in 2021 and maintained a US$60 billion gross-debt target for 2022. Production guidance for 2021 was 2.75 million boed before planned divestments and 2.72 million boed after expected divestments, with an estimated variation of plus or minus 4%.
- The plan assumes Brent prices of US$45 per barrel in 2021-2022 and US$50 per barrel from 2023 onward, together with specified Brazilian real/U.S. dollar exchange-rate assumptions. Actual results remain highly sensitive to commodity prices, refining margins and exchange rates.
- Management expects pre-salt production to represent approximately 80% of total production by 2025. The strategy emphasizes deepwater assets, lower lifting costs, portfolio divestments and reduced leverage.
- Material governance developments after year-end included the proposed replacement of CEO Roberto Castello Branco, potential changes to the Board and senior management departures. These developments created uncertainty regarding pricing policy, the Strategic Plan and asset divestments.
- Brazilian government ownership creates risks that public-policy objectives may conflict with shareholder-return objectives, particularly regarding domestic fuel pricing. Petrobras reduced wholesale diesel and gasoline prices in March 2021 after earlier increases, and future management may alter the international-parity pricing policy.
- Principal financial risks include oil and gas price volatility, Brazilian real depreciation, high foreign-currency debt, floating interest rates, refinancing needs, customer defaults and potential liquidity constraints if divestments or operating cash generation underperform.
- Other significant risks include COVID-19 effects, environmental incidents, decommissioning costs, cybersecurity, regulatory and licensing changes, CADE-mandated refining and gas-market divestments, climate-transition risks, pension and medical obligations, and litigation relating to Lava Jato and investor claims.
- As of December 31, 2020, provisions for decommissioning costs were US$18.8 billion. Possible, but unprovided, legal contingencies totaled approximately US$38.8 billion, including US$24.5 billion of tax claims, US$8.2 billion of labor claims and US$6.1 billion of civil and environmental claims.
- The company reported no material off-balance-sheet arrangements and stated that management and the independent auditor concluded internal control over financial reporting was effective.
Most Important Facts for an Investor to Verify
- Whether the announced debt-reduction path depends on divestments that are delayed, repriced or blocked by regulatory, political or market conditions.
- The sensitivity of cash flow, impairment charges, reserves and leverage to Brent prices, refining margins and the Brazilian real/U.S. dollar exchange rate.
- The outcome of the 2021 Board and CEO changes and any resulting modification of fuel-pricing policy or the 2021-2025 Strategic Plan.
- The sustainability of operating cash flow and free cash flow after the planned increase in capital expenditures and the resumption of postponed projects.
- The carrying values and future economics of mature, shallow-water and refining assets subject to impairment, hibernation or divestment.
- The potential cash impact of pension and medical obligations, decommissioning liabilities, environmental claims and unresolved Lava Jato-related investor proceedings.
- The terms, timing and conditions of the proposed US$1.977 billion shareholder distribution and its consistency with the company’s liquidity and debt covenants.
- The reconciliation and appropriate use of non-GAAP measures, including adjusted cash, free cash flow, gross debt, net debt and adjusted EBITDA, against IFRS measures.