Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental exchange on markets, leadership and vision and global business.
Speaker 1:
The dream drivers that have made the NYSE an indispensable institution of global growth for over or 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism.
Speaker 1:
Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome, Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
One of the main reasons, for starting Inside the ICE House over 150 episodes ago, was to bring to light just how connected to one another are the global markets that ICE serves across its exchanges.
Josh King:
Everyone hearing that thought, and our regular listeners don't need reminding, that the story began with Jeff Sprecher, setting out back in 2000 to modernize energy markets, before expanding the ICE process to include futures, commodities, clearing, equities, bonds, mortgages and more.
Josh King:
Today, ICE is the home of global energy pricing. Responsible for the global oil benchmark, Brent. As well as a number of other important benchmarks, including next year, the subject of a recent podcast episode Murban. The crude from Abu Dhabi in the UAE. That prospects for energy producers and those who invest in them across the globe, is tied to the price of energy.
Josh King:
Through the New York Stock Exchange, ICE is also where energy companies list their shares and investors can buy and sell those shares. This year 2020, also celebrates the 20th anniversary of the listing of one of the largest oil producers, in the world.
Josh King:
In August 2000, the Brazilian petroleum corporation known worldwide as Petrobras, listed right here on the NYSE. The company's listing was one of the largest in our 227 year history and was marked here at the exchange by Petrobras executives and their superstar company spokesman, the one and only Pele.
Josh King:
In June 2019, the company completed a $2 billion, follow-on offering and has returned to the New York Stock Exchange for an investor day that will be held this afternoon, in our boardroom. Joining us today Inside the ICE House is Petrobras's CEO, Roberto Castello Branco who just rang the opening bell and will be addressing that packed room of investors this afternoon, to present the company's strategic five year plan.
Josh King:
Our conversation with Roberto Castello Branco, on why Petrobras needs to mind the gap. And what does the future hold for the company and Brazilian oil. That's right, after this.
Speaker 3:
And now a word from Alberto Menache. CEO of Linx, NYSE ticker, LINX.
Alberto Menache:
Linx is a Brazilian software company, that does software for retailers. And we also have payments and financial services. Linx has 45,000 clients. We have a very diversified customer base. New York Stock Exchange, has a great history, the most important stock change in the world. Linx is listed on the New York Stock Exchange.
Josh King:
Our guest today, Roberto Castello Branco was on Petrobras board of directors from 2015 to 2016 and named CEO of the company in January 2019.
Josh King:
Previously, he was an executive and director at Vale SA. The mining company that's NYSE ticker symbol, VALE, and served on the board of several financial institutions. He's an affiliated professor at Fundacao Getulio Vargas that's FGV in Brazil, where he earned a Bachelor's Degree and Doctorate in Economics.
Josh King:
Mr. Branco also received a post-doctoral degree from the University of Chicago. Welcome back, sir, to the New York Stock Exchange and welcome Inside the ICE House.
Roberto Castello Branco:
Well, thank you. It's a pleasure to be here again. The NYSE is the house of capitalism. It's the capital of global capital markets. So it's always a pleasure to come here.
Josh King:
So this is your first time at the NYSE as CEO. How is that view from the Bell podium? I watched the video of you and your colleagues with our vice chairman, John Tuttle, up there this morning is global markets sprang to life with your pressing that button.
Roberto Castello Branco:
This is a very happy day for us. First, because we are here. Second, I would say thank you to markets, because markets this year recognized the effort. Petrobras, share price, outperformed all our peers. So it's a great achievement for the year.
Josh King:
Your background is in economics, and you've been a champion for public markets, including serving on the board of ABRASCA the Brazilian association of listing companies. Are the markets a topic you've always been invested in and grew up with discussing maybe with your mother and father?
Roberto Castello Branco:
No, at home we discuss, different things. Eventually we discuss about markets, because markets... Economic decisions are always in our life. When you decide what to do with your son, you give some recommendation to him or to her, economic reasoning is always present.
Josh King:
What was it like growing up for you with your parents in Brazil?
Roberto Castello Branco:
It was very good. It was nice. I was born in the north of Brazil in a small town, later on when I was a teenager, I moved to Rio, a big city. Took me some walk of adaptation, it was like at that time, long time ago, it was like migrating to a developed country. A boy from an emerging market economy, migrating to a developed economy. It was different acts and different air habits. So, and I'm easy to adapt to change.
Josh King:
How important was getting, the initial education you got in Brazil and continuing to add to that through frankly, the time that you studied in Chicago and also the experience that you had at MIT Sloan.
Roberto Castello Branco:
I believe that I am a privileged guy. Even in a last developed economy, I got a very good educational background, the elementary school, very good one, that prepared me to the further degrees. And I complimented my studies at the University of Chicago. The department of economics of University of Chicago, is one of the best in the world, if not the best with the largest numbers of Nobel Prize laureates. So I got a very solid training in economics. This helps us as a business executive.
Josh King:
Prior to being named CEO Petrobras you were with Vale, in sort of more of a investor relations role. How did you prepare to take on the leadership of more than 63,000 people. Now who [crosstalk 00:07:41].
Roberto Castello Branco:
Yes. I was, normally, I was the head of investor relations, but my role at Vale, was not limited to be investor relation. I was chief economist. I was linked to a strategy, so I did several other things, helping the CEO's. It was a very good experience. Vale is a great company. I learn a lot. It was a very good school to me.
Josh King:
So you've spoken, speaking of leading Petrobras of the need to digitally transform the company. How are you hoping to leverage technology in the coming years?
Roberto Castello Branco:
I believe that not only Petrobras, but oil and gas companies are being compelled to do that. The rate of change in the world has accelerated, into deepness among different business increased very strongly. Our main competitors are not the oil producers, are all people from other industries. So we must be more efficient, more lower cost and digital transformation. And particularly artificial intelligence will be key to achieve our goals.
Josh King:
When you were named Robert's CEO, you said that when you were first on the board in 2015, this is a quote from you. "I found a company in crisis, but with the professional competence and seriousness of its employees, and with solid corporate governance, Petrobras is much better today. There's still a lot to do though." That's what you said. So for our listeners who may not be familiar with the Petrobras story, can you give us a snapshot of the company from that point when you joined them, on the board to where it is today.
Roberto Castello Branco:
Petrobras at that time had, was suffering two crisis, a moral crisis, and the debt crisis, it was able to surpass this, to overcome this terrible challenge. It improved but when I started as a CEO, it was high, still high in debt with low return on capital employed.
Roberto Castello Branco:
That's why we are focused on these in very high costs of operations. This year, we managed to address these issues. Some progress was made, but I believe that many challenges lie ahead of us. So, I am very focused on dealing with this challenge. And I would say to you that our best days are still well ahead of us.
Josh King:
Our best day is still well ahead of us. We are going to share this episode of the public shortly after the New Year. Just a couple of days after you will have marked your one year anniversary as CEO of the company, how would you grade your first year on the job? What were those 12 months like?
Roberto Castello Branco:
I think that they are very good because I am very happy. This is a main metric that, am I happy? Yes, I am. So I believe that in the markets are the best judge and they are telling us that, we are not doing a terrible job. We are winning.
Josh King:
In your address, when you were announced as chief executive officer, you also spoke about efficiently, shepherding Brazil's natural resources, which includes pre-salt petroleum. What makes those deposits unique? Very special, you can't find them anywhere else in the world.
Roberto Castello Branco:
Well, they are unique because we have large reserves. Lifting costs is low. CaPEx costs are relatively low for a traditional oil separation, not compared to the shale oil that's a different kind of technology, but they are great because of that. The quality is good. So these are world class assets, long life, low cost of operation, low cost of investment and low risk exploration. But in order to be enabled to do that, you must have a highly skewed human capital and highly developed technology and Petrobras has these two conditions.
Josh King:
Highly skilled technology and great people. How do the reserves themselves compare to, those of other energy producing nations? Just read an article the other day on the status of the north sea and the Brent field I've mentioned Murban earlier, but where, from where you sit in Brazil and looking at Petrobras, what makes the oil from Brazil unique?
Roberto Castello Branco:
Well, our oil is relatively light, so it trades at a slight premium to the Brent. They are in a much deeper regions in down the sea. That's makes a special technology to be developed. The technology of the Nazi is not applicable to the pre-salt.
Roberto Castello Branco:
The pre-salt is the new frontier of oil exploration in the world. You have two place in the world, the shale oil in the United States, particularly the Permian basis and the pre-salt in Brazil. They are the two frontiers of oil output expansion, globally.
Josh King:
People listening to this podcast, are probably somewhat familiar with oil shale extraction in North America. Give us a picture though, of pre-salt drilling and actually, what is involved in extracting oil using that process?
Roberto Castello Branco:
Well, it's a different type of rock. It... You have to exploit oil at the 3000, 5000 meters deep in the sea. So, and it's, we have oil deposits 300 kilometers off the coast. So logistics is also very important. It's a highly capital intensive business. Each production union costs about 6 billion US dollars. It's a different kind of game.
Josh King:
A different kind of game. After the break, Robert Castello Branco will explain the need to mind the gap, in order to meet the ambitious goals Petrobras has set for 2025. That's right after this.
Speaker 3:
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Josh King:
Welcome back before the break. Robert Castello Branco, CEO of Petrobras NYSE, ticker symbol PBR, and I were discussing his first year on the job and how it's gone. The five year strategic plan. The Petrobras is launching in 2020 is titled, Mind the Gap. What is the gap that Petrobras intends to overpass?
Roberto Castello Branco:
Well, why mind the gap? We decided from the very early beginning, that we should take an outside view, not an inside view. I don't like to compare Petrobras. Well, this year we are better than last year. And this year, we are better than to 2015.
Roberto Castello Branco:
We have to look to the world, to the major oil companies. And taking these outside view, we realize that are well behind in terms of costs. In terms of efficiency.
Roberto Castello Branco:
So our goal is to close the gap. To be among the best oil companies in the world, is not only a question of volumes, of quantities. We have to be a high quality company in order to deliver a lot of value to shareholders. This our view.
Josh King:
So you say not only volume, what are the other key metrics that you have in your dashboard that means so much to [crosstalk 00:17:07].
Roberto Castello Branco:
Return on capital employed, is key to us. Cost of capital. We have to lower cost of capital. Our ambition is to conquer, to recover our investment, grade rating status. We lost a few years ago due to the problems of the past. We are looking for regaining the investment grade rating and to reduced costs. There is a relentless search for lower costs in our company.
Josh King:
The first paragraph, of your strategic plan, before even introducing the background on the name is a commitment to become the best energy company at creating value for shareholders. So, how are you going to accomplish that goal? And how does leading with shareholder value help drive the overall success of the plan?
Roberto Castello Branco:
Oh, first of all, we have plan, with five strategic pillars, that involve maximizing return on capital employed. Deleveraging in order to reduce the cost of capital. Reducing costs, meritocracy, incentivizing people to perform and people for focus on people safety, is key in the environment.
Roberto Castello Branco:
These are five pillars. And use hard work, hard teamwork of talented people. We have many talented people in our company. We have some of the best oil engineers and geologist in our company. You, we use all the, our means, to achieve this goal.
Josh King:
So with those five pillars, Petrobras says that its oil output will increase by 32% by 2024. How do you intend to reach that goal?
Roberto Castello Branco:
Well, developing our reserves, we have reserves, we are speeding up the developer, the fields, we are even in, we have involved in a project using artificial intelligence with machine learning. We have a huge amount of data to manage, to reduce, to the period between the beginning of exploratory walks to a first oil.
Roberto Castello Branco:
This will shorten the, this period. That's very important. Time is very important in terms of return of project. This is very key. We are also making effort in order to minimize the risk of exploration. To allow us when we are going to drill well, to have a very high probability of finding oil in that drilling.
Josh King:
So as of the recording of this episode, in terms of finding the oil, following the drilling, the price of a barrel of oil is about $55. When you're putting together a strategic plan for a company dependent on a commodity that whose value will vary over time. How do you prepare a plan that is resilient to market pressures? Where, you don't exactly know where the price is going to be in a year.
Roberto Castello Branco:
Yes, nobody knows. As we economies say, oil price of share price, they make a random walk. The price today does not contain any information about price in the future. So the best thing to do, I learned in this lesson, working in a mining company, that there are two conditions we must obey.
Roberto Castello Branco:
First to have very low costs, because you are, if you are a very low cost producer, you are going to make money in every scenario. If price are high, you are going to make a lot of money. If price are low, you survive, you are going not to going to lose sleep at night.
Roberto Castello Branco:
This is a very simple prescription and highly recommended. And second, you have to have low leverage, because if you are in a business that's exposed to high price volatility, and there's a consequence with high cash flow volatility. You cannot run the risk of being caught, in a highly leveraged position in a down cycle.
Josh King:
The two levers that you are mentioning cost and debt are the two things I want drill into just for a minute. So we, you talked about one aspect of your resilience plan is cutting cost. And as CEO, you have moved Petrobras ahead with its divestment plan. Tell us about some of those divestments and why it's so important to the company.
Roberto Castello Branco:
Well, we decided to focus on the assets, in which we are the natural owners. Natural owner means when asset, then we are able to extract maximum value, and to sell those assets were, in which were not the natural owner that others can do better than us.
Roberto Castello Branco:
So we are selling downstream operations, midstream operations. Want to be in this. We need the service of transportation and distribution, but we don't need to be the owners. Let's be an asset light company in this type of business.
Roberto Castello Branco:
We are selling mature fields, on shore and in shallow waters, because in these fields, we have low productivity, high cost of lifting, high lifting costs. So it's better to sell to smaller companies, that can do better than us.
Josh King:
And now onto having looked at cost. Let's look at leverage. You've been strongly reducing the company's debt. You said you'll pursue more deleveraging in the coming years. Why is that strategy so important at this time?
Roberto Castello Branco:
It's very, very important in order to reduce the cost of a capital. We use a lot of capital. So, it's natural to pursue the lowest cost as possible.
Josh King:
The strategic plan also includes a 10 commitments for low carbon and sustainability agenda. How will Petrobras, accomplish the set of decarbonization aspects that the plan sets out?
Roberto Castello Branco:
Well, we have achieved several progress in this area. For instance, over the last five years, we are second only to Equinor, the Norwegian company in terms of reduction of carbon emission. We currently, we already do a lot of carbon capture re injecting CO2 into the wells. So we have many projects in progress and it's fair to commit to goals in order to deal with climate change.
Josh King:
I mean, on that broader aspect of climate change, what role should an energy company play in biodiversity and socio environmental projects?
Roberto Castello Branco:
We are starting decarbonizing our operations, our natural gas production, which cleaner than oil is going to rise significantly in the future. And we are investing in research and development about renewables. We are not going to invest in renewables right now because we lack the competence.
Roberto Castello Branco:
Renewables is a different business from oil. We know very well to explore and produce oil, but we know nothing, about the business of renewables. So we are not going to invest just for the sake of showing others, that we are dealing with climate change. We're not going. If you lose money, it'll lead you to nowhere. So it is better to learn about the business. And once we know how to do, to thrive in this kind of business, we can move.
Josh King:
So as we wrap up, I just want to go back to how I introduced this episode. Where do you see Petrobras's role in the global economy, as you enter year two, and then the subsequent years of your role as CEO of the company.
Roberto Castello Branco:
Oh, I expect to see Petrobras as a much more efficient company with much more productive, with lower costs and to be a very focused company on oil and natural gas.
Josh King:
Will you, what will be you be looking to change in 2020 and then in the years ahead?
Roberto Castello Branco:
Well, this is in, I believe that in 2022 Petrobras will be a company, quite different from what it is today. It's a little bit different, Petrobras is ending 2019, a little different, a little bit different that it was by the end of last year. And it's going to change much more in the next couple of years.
Josh King:
A company that's quite different than it is today. Thank you so much, Mr. Branco for joining us Inside the ICE House.
Roberto Castello Branco:
Thank you so much. It was a pleasure.
Josh King:
That's our conversation for this week. Our guest was Roberto Castello Branco, CEO of Petrobras. If you like, what you heard, please rate us on iTunes, so other folks know where to find us.
Josh King:
And if you've got a comment or question, you'd like one of our experts to tackle, on a future show, email us at [email protected] or tweet at us @ICEhousepodcast. Our show is produced by Pete Asch with production assistance from Ken Abel and Ian Wolff. I'm Josh King, your host signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE, nor its affiliates, make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein.
Speaker 1:
All of which is presented solely for informational and educational purposes. Nothing here in constitution offer to sell. A solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of mental clarity.
