Read the message from our CEO, Roberto Castello Branco, commenting on our results.
We express our solidarity with the victims of the global pandemic, at the same time as we are deeply grateful to the health professionals who have been standing out as true heroes in the war against the COVID-19 disease.
The global pandemic threatens our lives and our livelihood. The main public health measure resulted in a global, synchronized and deep recession, absent the knowledge of more effective options. The global oil and gas industry has been hit hard and is facing its worst crisis in the last 100 years.
We tried to react quickly to face the challenges ahead of us, by, first of all, prioritizing the health of our employees and the financial health of Petrobras.
Among other measures, we have adopted home office and the reduction of operations teams - today we have only 10% of the staff in the offices and 50% in operations – combined with strict cleaning of the facilities, use of personal protective equipment (PPE), selection, testing and quarantining of suspected cases. Thanks to the digital revolution and the commitment of its employees, Petrobras continues operating normally and acting quickly, as the crisis requires.
Exercising good corporate citizenship, we joined efforts to mitigate the effects of COVID-19 on the Brazilian population through the donation of R$ 30 million, comprising RT-PCR test kits, PPEs, medical and hygiene materials and 3 million liters of fuel to supply vehicles for public and philanthropic hospitals. Additionally, we shared knowledge from our scientists and part of the capacity of our supercomputers for research related to COVID-19.
As it is tradition, our employees have engaged in voluntary initiatives aimed at minimizing the impact of the pandemic on the poorest communities.
We favored liquidity, drawing down revolving credit facilities and postponing cash disbursements, such as those related to executives’ wages, variable compensation payments and the remaining portion of dividends. We reduced Capex in US$ 3.5 billion for this year, mothballed 62 platforms operating in shallow waters that, in a scenario of low Brent prices, started to bleed cash and we are renegotiating contracts with major suppliers aiming at extending payment terms and reducing prices.
We ended the first quarter of 2020 with a cash balance of US$ 15.5 billion, what implied a debt increase of only US$ 2.1 billion compared to December 2019, as in the first two months of the year we had continued to reduce the company's debt. The increase in short term debt does not mean we gave up on the strategic objective of pursuing a gross debt of US$ 60 billion. We are implementing several actions that, among other consequences, will act to restrict cash consumption and will eliminate the need to resort to new net financing.
In the prevailing environment of uncertainty, we decided to maintain a much higher cash balance during the crisis than before, which in the short term has a negative impact on the return on capital employed, but which also does not mean abandoning the goal of maximizing it to create value over time.
Simultaneously with the use of emergency measures, we are working to ensure that Petrobras comes out much stronger in the recovery from this recession. We are confident that by intensifying the execution of the strategy put in place since the beginning of 2019, together with the acceleration of the digital transformation is the best path to generate value.
The recent creation of a logistics executive officer and the strengthening of marketing and sales activities were quickly reflected into a more aggressive stance in crude oil exports - which in April reached a historical record of 1 million barrels per day - and fuel oil and bunker oil exports. Given the reduced level of variable costs in our E&P operations and the hedging strategy put in place, exports contribute to cash generation in the short term, partially offsetting the effect of the deep contraction in domestic fuel demand. This movement anticipates the preparation to thrive in a more competitive environment in the future.
The growth in exports and the reduction in the refineries utilization factor contributed to avoid the build-up of excess inventory, one of the most serious problems that affect the oil industry today.
In contrast to what happened in 2008-2009, we are predicting a slow recovery in global economic activity and, consequently, in demand for fuels. The nature of the shock is different, more powerful. The sudden loss of income is accelerating the financial leverage of families, companies and governments and the uncertainties associated with the lack of a vaccine, that may only be available in 2021, and the political and trade tensions between the US and China, a country that plays a critical role in the global supply chain also hinder the vigorous recovery of the global economy.
In the specific case of oil, the execution of the production cuts promised by members of OPEC+ is quite uncertain given the long history of non-compliance and the temptation caused by the need to generate cash for some of its members. The behavioral changes generated during the social distancing phase and the governmental incentives to replace fossil fuels are other factors that lead us to have a more cautious view on the evolution of oil prices over the next few years.
We are reinforcing capital allocation discipline by carrying out a complete revision of our oil and gas exploration and production projects portfolio to decide which ones will be effectively implemented or reviewed in a price scenario of slow recovery to a level of $ 50/bbl. Competition for capital between projects has become more fierce and only those that pass this stress test will survive. We raised the bar, seeking to maximize returns on capital employed.
The relentless search for low costs is one of the pillars of our strategy and the global recession only reinforces the urgency of its execution. This year we aim to reduce administrative and operating costs by at least US$ 2 billion and we are taking several measures to promote a permanent reduction in the fixed cost structure.
The recent approval of a more attractive voluntary dismissal program (PDV) resulted in the immediate enrollment of approximately 1,200 employees in April, totaling more than 3,000 who will leave the company by the end of this year, and we expect more enrollments in May and June.
Our Board of Directors approved a change in the self-management model of AMS - Supplementary Medical Assistance so that, through a professional and focused management, we shall have an operation at significantly lower costs, more efficient and capable of providing services of a far superior quality compared to the current standard. We estimate that the change will result in savings of R$ 6.2 billion over the next ten years.
After four years and a long negotiation process, we were able to obtain the approval from the regulatory agencies for the new plan to deal with the deficit of our pension fund, Petros. Petros has been the target of several assaults, as determined in the context of Greenfield operation, that caused severe damages.
The divestment program remains intact although it may suffer delays. In particular, we are confident that at least a significant part of the refinery sales shall have purchase and sale contracts concluded by the end of 2020.
The global recession did not significantly affect the company’s performance in 1Q20, which is expected to happen in the following quarters. For instance, free cash flow was US$ 5.9 billion, much higher than the US$ 3.1 billion of 1Q19.
However, the 1Q20 results were considerably impacted by impairments of US$ 13.4 billion, as a result of carrying the impairment tests, implying a non-recurring loss of US$ 9.7 billion, without any effects on Petrobras' cash flow. We consider that our strong commitment to transparency must always prevail and we decided to apply the test as soon as possible, considering new price and FX scenarios.
The assets that had their values adjusted are mostly oil fields in shallow and deep waters, whose investment decision was made in the past and based on more optimistic expectations for long-term prices. We are not surprised by its devaluation in a more challenging environment.
The net loss in no way affects Petrobras' health and sustainability. This is a quite different situation from the one experienced in 2014-2015, when the company was facing two crisis, one financial and another moral, and the impairments at that time reflected the company’s vulnerability.
We will move forward with a balance sheet more connected to the market reality and a focus on value generation, continually pursuing returns on capital employed above the cost of capital.
To reach this objective, it is crucial to continue implementing the long-term strategy enriched by the lessons we are learning from this crisis and which will help us to operate more efficiently and at lower costs.
We continue to work with courage and optimism, confident that with the contribution of its highly competent professionals and world-class assets, Petrobras will become an increasingly stronger and value-generating company.
Check the full report on our Investor Relations website.