Last Update: 8:59 AM EST February 20 2007
The state owned oil company of Brazil reported that its revenue for the Q4 grew to $19.5 billion from $18.6 billion a year ago. The fiscal 2006 net income of R$25.9 billion surpassed the record set in prior year quarter, on higher oil and byproduct production and the domestic and foreign market price levels. In Q4, the unit refining cost grew 21% in Dollars terms due to the greater complexity that resulted from the investments made to process heavy oil and to improve fuel quality.
The state owned oil company of Brazil reported that its revenue for the Q4 grew to $19.5 billion from $18.6 billion a year ago. The fiscal 2006 net income of R$25.9 billion surpassed the record set in prior year quarter, on higher oil and byproduct production and the domestic and foreign market price levels. In Q4, the unit refining cost grew 21% in Dollars terms due to the greater complexity that resulted from the investments made to process heavy oil and to improve fuel quality.
Key questions and answers from the fourth quarter fiscal 2006 earnings call conducted by Petroleo Brasileiro on February 14, 2007.
The lifting cost increased quarter-over-quarter. Could you comment on that increase and how much had specifically to do with the salary adjustments?
The firm had an increase of $0.60 from the third quarter to the fourth quarter in the lifting cost adjusted to sales. About half of the increase was due to the passing of cost.
Do you think it’s fair to say that although the firm is going to see an improvement in the Q1 in terms of production, a bigger improvement will take place more in the Q2 as opposed to the Q1, given how the ramping up of the different platforms you are currently working on is looking like?
The company is expecting an increase in production in February and March in this quarter. January, the firm had a decrease of 46,000 barrels per day due to the tonnage stoppage for maintenance of the FPSO P-37 in the mining field. Their platform depth has been put on extreme recently, the P-34 FPSO Rio de Janeiro and Capixaba. They shall reach peak production by the end of the year. Hence upto mid of the year, the firm shall have production increase because it has the Piranema that only start producing before the end of May. Also, the firm has the field of Mamachi that came on-stream last week. During this half to the year, the firm expects to have production increase during all the time. There will be the new platforms by September, the P-52 and P-54, to be installed in Hong Kong field.
The inventory costs had a big negative impact this quarter. Given the market condition as it relates to oil prices and gasoline prices in the Gulf, is it fair to say that part of that negative impact could be made up or has already been made up at the very beginning of the first quarter of 2007?
It’s correct. The firm can expect an improvement in the cost of goods sold in the first quarter of 2007 because it has the opposite movement that it had this quarter.
Why did the import costs went up in the fourth quarter? Also, so far in January, you have been following the same strategy which would result in import costs continue to increase into the beginning of the first quarter of the year?
Yes. At the beginning of January, the firm was still following the same pattern, because it was economically advantageous to import light oil, process and make diesel instead of processing the domestic oil and make more pure oil. But, obviously the winter came on later, but came in the beginning, in the mid of January and this made the market react and the fuel oil cost went up. At this point in time, the management believes that it’s no longer economical to do what it has done at the end of the year.
Earlier you were talking about the negative impact from the liquidation of the high cost inventory. Do you have a number you can share and how big is that negative?
The cost occurred over from third to fourth quarter due to the higher cost of inventory that was formed in the third quarter. It was about R$1 billion.
You earlier had mentioned about the contract negotiation in Argentina that impact your production. Is that a one-time impact or that is going to be on a ongoing basis?
There were two consequence on that strikes that the firm had there. One was the salary increase and this is permanent and the second was production decrease and this is one-time.
How big is the production loss related to that?
The firm lost in average 2500 barrels of oil during the quarter.Can you give an update on where you are in terms of the new refinery that you plan with Pedevesa in Brazil?
The firm has not finalized its agreement with them, but it is also going on with the basic designs of the refinery. This is the stage of the construction of the refinery; the firm is working on the basic design. The firm had significant dry hole costs within international. Can you comment on where they came from?
The dry hole cost came mainly from the US in the first quarter. In the US, the firm has expensed dry wells and it had dry wells in Bolivia, not Argentina. There were some cost of seismic as well. The average cost of refining Pasadena is $2.71 barrel and the firm expects to increase the complexity of the refinery to make it able to process the Brazilian crude.
Isn’t the debt-equity ratio too timid for a company with investment grade ratings? Aren’t you giving up on improving company’s walk by having higher debt in your balance sheet?
The management is working on that and the share buyback will help the firm to increase the leverage. The firm is looking for other opportunities. But the cash flow generation was very strong. The firm still has a leverage that is not the firm’s ideal and it would like to have more to near 30% of leverage. This would give the firm a better walk. With investment grade now, the firm could work with some possibilities that could be provided by the banks as other oil companies has outside Brazil, but it feels that it does not have this flexibility available and with no costs up to the use, this will help to reduce the cash balance.
The management is working on that and the share buyback will help the firm to increase the leverage. The firm is looking for other opportunities. But the cash flow generation was very strong. The firm still has a leverage that is not the firm’s ideal and it would like to have more to near 30% of leverage. This would give the firm a better walk. With investment grade now, the firm could work with some possibilities that could be provided by the banks as other oil companies has outside Brazil, but it feels that it does not have this flexibility available and with no costs up to the use, this will help to reduce the cash balance.
Last year the firm had bought some of its bad debt and also completed that exchange transaction recently as well. Are you done with your debt buybacks? Are you planning to issue any dollar-denominated bond this year?
The firm has completed the debt buyback and the firm would like to buy all the old debt. The firm may issue dollar denominated bond this year in Brazil. The firm in one month time will bring to the markets the CRI, the Brazilian bond that is related to buildings, build constructions. Internationally, the firm doesn’t have plans at the moment, it all depends on the oil price. If oil price will keep as it is today, probably the firm will not be tapping the market till the end of the year.
You mentioned about the P-37 well maintenance in January. Is the maintenance going to take one month?
The maintenance of beta 7 and the sales of February started 19th of January and then the firm had a factual stoppage for some days and then the firm has a full stoppage on the 1st January and partial stoppage in February. The firm lost 46,000 barrels.
In Europe, you mentioned a number of changes on the E&P program from now until 2011 with the most notable ones being the cancelation of the bidding process for those big FTSOs that were going to come online in the end of the period. There is no change as of now on the production guidance. Are you still sticking to the number for 2011?
Yes. The firm is keeping the targets due to 2011. The production target for 2007 is 1 million 919 as always the firm has in demand. From 2008 to 2011, the company is keeping these targets from the strategic plan.
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