Petrobras: Petrobras posts R$ 4 billion net profit in the first quarter of 2019

Petrobras posts R$ 4 billion net profit in the first quarter of 2019

Petrobras reported a net profit of R$ 4 billion in the first quarter of 2019, an increase of 92% over the fourth quarter of 2018, mainly due to the lower occurrence of special items, with a total of R$ 600 million (negative). Adjusted EBITDA of R$ 27.5 billion was 6% lower than the fourth quarter of 2018, mainly driven by lower Brent prices, while free cash flow was positive for the 16th quarter in a row, with a total of R$ 12.1 billion.

"In the first days of the year, we started a transformational agenda based on strategic pillars: maximize the return on capital employed, reduce the cost of capital, ceaseless pursuit of lower costs, implement a meritocratic culture and respect for people and the environment, with a focus on operations safety. We want to prepare the company for the challenges of the future,” says Petrobras CEO Roberto Castello Branco.

Impacts of the adoption of IFRS 16 and the company’s deleveraging strategy

The disclosure of the financial results for the first quarter of 2019 marks the adoption of the IFRS 16 accounting standard by Petrobras. The new standard, which is being adopted by all companies that follow the IFRS standard (international accounting standards), refers to leasing operations.

Among the changes in the standard, IFRS 16 eliminated the classification between financial and operating leases, so there is a single model in which all leases result in the recognition of assets related to the rights to use leased assets and a lease liability.

With the adoption of IFRS 16, the company no longer recognizes operating costs and expenses arising from operating leases, acknowledging in its income statement: the effects of the depreciation of the rights to use leased assets; and the financial expense and foreign exchange variation determined based on the financial liabilities of the lease agreements.

Economic-wise, nothing changes in relation to the company and there is no relevant impact on the company's cash. However, in accounting terms, there are effects on the balance sheet, since lease expenses are no longer recorded, which are now posted as depreciation and interest. This impacts some of the company's indicators, such as the adjusted Net Debt/Adjusted EBITDA, which increased to 3.19x. If the effect of adopting IFRS 16 was purged, this metric would end the quarter at 2.37x. The adoption of IFRS 16 does not change the company's deleveraging strategy, while maintaining the target of reducing the Net Debt/Adjusted EBITDA to 1.5x by 2020.

The company's gross debt decreased by US$ 23.6 billion over the last 12 months, reaching US$ 78.8 billion at the end of March 2019 (excluding the effects of IFRS 16). The benefits are already being felt by the company: the financing expense in the first quarter of 2019 was US$ 1.6 billion, a decrease of US$ 294 million compared to the first quarter of 2018, which represents annualized savings of US$ 1.2 billion.

First quarter operating income

Oil production decreased 4% compared to the previous quarter, due to the usual concentration of maintenance shutdowns in the first quarter. Production growth expectations are maintained, with an annual target of 2.8 million boed, as new systems move forward in the process of gradual increase in production (ramp-up) to reach stabilization, especially those that started in the first quarter: P-67, P-76 and P-77. But these were not the only more recent ones. In the last 11 months, seven production systems went into production, with a total capacity of 1.05 million boed, an industry record. Another important milestone we reached was the daily peak of production in the pre-salt, which surpassed the 2 million boed.

Petrobras' market share decreased for diesel and gasoline. This indicates that there was an increase in competition in the refined oil products market, due to the competitive prices adopted by the company.

The company's recordable accident rate per million man-hours (TAR) closed the quarter at 0.93, below the 1.0 alert threshold, showing a decrease of 8% over the previous quarter.

Prospects for 2019: portfolio management  

In line with the concentration target on the assets in which we are natural owners, our divestments reached US$ 11.3 billion in the first four months of the year, a record for Petrobras. The highest transaction value was for the sale of 90% of TAG for US$ 8.6 billion. During this period, the company launched the Liquigás sale teaser and added several assets to its divestment program: eight refineries, the Uruguay service station network and holding a secondary stock offering of Petrobras Distribuidora.