Petrobras - Petroleo Brasileiro's (PBR) Management on Q3 2018 Results - Earnings Call Transcript

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About: Petrobras - Petroleo Brasileiro S.A. (PBR)
by: SA Transcripts

Petrobras - Petroleo Brasileiro S.A. (NYSE:PBR) Q3 2018 Earnings Conference Call November 6, 2018 11:30 AM ET

Executives

Isabela Carneiro da Rocha – Executive Manager-Investor Relations

Rafael Salvador Grisolia – Chief Financial and Investor Relations Officer

Solange da Silva Guedes – Chief Exploration and Production Officer

Jorge Celestino Ramos – Chief Refining and Natural Gas Officer

Nelson Luiz Costa Silva – Chief Strategy and Performance Officer

Hugo Repsold – Chief Technology and Production Development Officer

Analysts

Bruno Montanari – Morgan Stanley

Gustavo Allevato – Santander

Regis Cardoso – Crédit Suisse

Andre Hachem – Itaú BBA

Vicente Falanga – Bradesco

Gabriel Barra – UBS

Fernanda Cunha – Citi

Operator

Good day, ladies and gentlemen. Welcome to Petrobras Conference Call with Analysts and Investors for the presentation concerning its Third Quarter 2018 Results. Now, I would like to inform you that participants will be in listen-only mode. During the company’s presentation which will be conducted in Portuguese with simultaneous translation into English. Following the presentation, a Q&A session will begin when further instructions will be provided. [Operator Instructions]

Present with us today are Mr. Rafael Salvador Grisolia, Petrobras Chief Financial and Investor Relations Officer; Ms. Solange da Silva Guedes, Chief Exploration and Production Officer; Mr. Jorge Celestino Ramos, Chief Refining and Natural Gas Officer; Mr. Nelson Luiz Costa Silva, Chief Strategy and Performance Officer; Mr. Hugo Repsold, Jr., Chief Technology and Production Development Officer; Mr. Rafael Mendes Gomes, Chief Governance and Compliance Officer; Mr. Eberaldo de Almeida, Chief Human Resources, HSE and Services Officer; as well as other company officers.

I would like to remind you that this meeting is being recorded, and please be mindful of Slide 2, which contains a notice to shareholders and investors. The words believe, expect and similar ones related to projections and targets of the company are mere forecasts based on the expectations of Petrobras executives regarding the future of the company.

To begin, we will hear Ms. Isabela Carneiro da Rocha, Executive Manager of Investor Relations, who will start with the presentation about the third quarter 2018 results. Subsequently, the questions from participants will be answered. Please, Ms. Rocha, you may begin.

Isabela Carneiro da Rocha

Good day, everyone. I would like to thank all of you for joining us in this webcast to discuss third quarter 2018 results of Petrobras. After noticing shareholders on Slide 2 about forward-looking statements, we now begin presenting our results with our top metrics. We are on Slide 3.

We can see our safety indicator measured by TRI, total recordable injuries frequency by million man hours. That rate remained at the same level of the prior quarter at 1.06. After a dramatic reduction since 2015, TRI has been maintained in the range between 0.95 and 1.09 in the last 12 months, and the company remains committed to safety. It's implementing efforts to comply always with the warning limit of 1.0. These efforts include continuous improvement in our safety conditions, adoption of practices of international benchmarks in addition to offering programs, seminars and training sessions, both for our workforce and our suppliers.

On Slide 4, we have our second top metric. Our leverage metric measured by net debt over adjusted EBITDA. We noticed a dramatic reduction since 2015. And we achieved the value of 2.96 in the end of the third quarter 2018, excluding the effect of the Class Action settlement, because this is how it will be by year-end. When this effect will no longer impact our EBITDA, we would have reached the ratio of 2.66 in line to achieve our target of 2.5 net debt over EBITDA ratio.

Moving on, we're going to the main highlights in 2018. Solid results, a lower debt level and shareholders' remuneration that is paid one more time. Regarding the constant improvement of our financial result, I'd like to highlight a net income of BRL 24 billion, up 371% compared to the same period of 2017 and the best result since 2011. Adjusted EBITDA was a historic record mark reaching BRL 86 billion, 35% up compared to nine months of 2017 and our EBITDA margin was 33%.

Reduced uncertainties was an important point with the DOJ/SEC settlement to end investigations of the company by U.S. authorities. This supplement amounted to BRL 3.5 billion with the largest portion of this amount, 80%, staying with Brazilian authorities so – and instrumented to be signed with the federal Public Prosecutor's Office. Net of the effects of the Class Action settlement and of the DOJ/SEC settlement, net income would have been BRL 10.3 billion in the quarter and BRL 28 billion year-to-date. Also excluding this effect, adjusted EBITDA would be BRL 33 billion in the quarter and BRL 89 billion year-to-date. If we adjust for all of these special items that are in Table 18, our net income would be in line or even above market expectations.

In terms of net debt reduction, I'd like to point to a reduction of gross debt and net debt. $88 billion of gross debt and $72.9 billion net debt. And asset liability managed, enabled extension of average debt maturity to nine years with an average interest rate of borrowings of 6.2%. As mentioned, net debt over last 12 months EBITDA adjusted – adjusted EBITDA was 2.96 in September. Considering net income year-to-date, the reduction of uncertainties through the supplements that were mentioned.

And our financial leverage target, our Board of Directors approved, in advance, of payment on – payment of interest on equity of BRL 0.10 per share, equally for preferred and common share, totaling BRL 1.304 billion as advanced payment of interest on equity.

Moving to the next slide, we bring you other highlights. The start-up of three new systems this year, and we have a fourth one to – about to begin operating. So we had FPSO Cidade dos Campos de Goytacazes and Tartaruga Verde, P-67 is Búzios. And on terms of exploration portfolio, in the latest shared production round of ANP, we acquired the southwest block of Tartaruga Verde that adds to the blocks we achieved in the 11th bidding round in March, and the other one in June, and the total of warrant bonuses heading BRL 3.2 billion.

We would also like to highlight the partnerships that we signed. In renewables, we signed with Equinor to work in the segment of offshore wind power; with Total for renewable power, particularly solar, on solar and wind; a partnership with CNPC for the Comperj project and the Marlim cluster; and a partnership with Murphy to operate in the Gulf of Mexico.

In addition, we highlight the receipt of BRL 1.6 billion referring to the second phase of the diesel subsidy program. In addition to BRL 1.6 billion received, there's still BRL 2.2 billion already recognized in the balance sheet of the third quarter to be received, referring to the third phase of the program.

Regarding gasoline, the price of gasoline, we adopted a complementary hedge mechanism for gasoline allowing for less frequent price adjustments. And we were reimbursed – the company was reimbursed BRL 1.7 billion of resources recovered from operation Car Wash Lava Jato, total amount recovered totals BRL 3.2 billion.

Detailing our results, we'll start with our external variables on Slide 7 showing the behavior performance of Brent oil price in line with the prior quarter. Totaling USD 75 per barrel, 39% up compared to the nine months of 2017. However, the Brazilian real depreciated a lot in the third quarter with exchange rate increasing 9% compared – or quarter-on-quarter and 13% year-on-year.

In here we have a summary of our results on Slide 8. We show you sales revenues totaling BRL 257 billion, up 24% compared to nine months of 2017. Gross profit increased 40%, totaling BRL 93 billion. Adjusted EBITDA grew 35% to BRL 85.7 billion. And net income increased 4.7x to BRL 23.7 billion. Free cash flow remained positive for the 14th consecutive quarter, reaching BRL 37.5 billion in the nine months of 2018, which is the same level of the prior year.

Moving on, we will detail further each one of these variables. Let's start with adjusted EBITDA. As a result of the increase in Brent oil price and a higher margin of sales of oil products in the domestic market and exports market. This is a historical record mark. It is important to observe that it is superior, even the value that we had in the period of 2011 to 2014 when the Brent oil price was much higher than it is currently. This is the result of not only external variables but also of cost discipline and financial management and efficiency, which has been implemented in the company.

Looking on to Slide 10. The business segments. In E&P, the higher Brent oil price and Brazilian real depreciation helped reach 63% – to reach a 63% increase, but also the lifting cost, which was under control, played a role. In refining, transportation and commercialization or downstream, we had the lowest price differential for diesel and gasoline compared to Brent oil prices. However, refining margins increased because of the inventories that we formed at lower prices. This is coming in the market when we count that the oil price will appreciate.

Despite a lower total sales volume that we had because of the loss of market share for gasoline to ethanol and the lower sale of naphtha to Braskem, the sales volume of diesel increased – we increased our sales volume and the market share for diesel. In addition, there was a reduction in refining cost. All of these factors were responsible for an 8% increase in the adjusted EBITDA of the segment.

In terms of our trade balance, there was a reduction in the net exports of oil because of lower production and an increase in the net exports of oil products, given the lower sales volume in the domestic market.

Moving on, we bring the behavior of diesel pricing. We explain a little the diesel subsidy program, which was created in June. So the chart shows in blue, the price of diesel in the Gulf. The full line, commercialization price of diesel before the diesel subsidy program and after. And in yellow, we have the reference price, diesel price added to the amount of subsidy. What we can see is that the price of diesel after subsidy is following the price of the U.S. Gulf, so reference price is in Brazil, following the variation of international prices of diesel.

Reference price is determined by E&P based on international price and exchange rate variation. And we recognized revenue of subsidy as diesel is sold and delivered to distribution companies. And the right to reimbursement is recognized in our line item accounts receivable. The company recognized in the third quarter a total of BRL 3.8 billion referring to the program. And of this BRL 3.8 billion, we have received BRL 1.6 billion referring to the second phase. We still have BRL 2.2 billion to be received referring to the third phase.

Moving to Slide 12. We give you more color on the increase of our operating income, which was a record. In addition to the variables that we have highlighted, it is important to mention that we had a reduction in G&A expenses. We had the lowest ever G&A expenses. We would also like to highlight cost control discipline, a lower spending with interest rates, given our lower debt level, our financial expenses decreasing BRL 2 billion compared to nine months of 2017.

On the other hand, the higher oil price led to high expenses with government take, and we had the supplement with DOJ/SEC as previously mentioned. And as previously mentioned, net of these effects, net income in the quarter would have been BRL 10.2 billion in the third quarter. If we were to exclude all special items, it would be BRL 11.5 billion. Year-to-date, it would have been BRL 28 billion.

Moving to Slide 13. We bring you our free cash flow and its performance. It was BRL 8.1 billion lower than the second quarter of 2018, reflecting lower cash operating – lower cash generation because of the payments of the second portion of the Class Action settlement coupled with a greater realization of investments in the period. As for investments, it's important to highlight that we invested BRL 32.2 billion in the first nine months of the year, representing a 10% increase year-on-year. And in this quarter, investments was 50% higher than the second quarter. And this was a planned increase because we had indicated a realization of investments. Actually, we were realizing less in the first half of the year. So the expenses, operating generation led to a positive free cash flow for the 14th consecutive quarter as we see on the slide.

Moving to the next slide, Slide 14. Here, we bring you the reduction of our debt level from January to September. Actually, our gross debt in the end of the third quarter was $88.1 billion. This chart is in dollars, by the way. And net debt $72.9 billion. And we think to get to the end of the year under $70 billion with an approximate value of $69 billion of net debt.

From January to September, the company continued with an active liability management. We raised BRL 30.6 billion, and we paid a number of borrowings and loans, highlighted to BRL 43.3 billion in securities in the international capital market and the prepayment of BRL 41.8 billion of loans in the banking market, both in Brazil and abroad in addition to BRL 2.4 billion loans with BNDES. With this liability managed, we were able to extend the average maturity to 9.1 years in the third quarter, now maintaining the average interest rate of around 6.2%.

We are on Slide 15, please. Here, we bring you the profile of our debt as a result of liability management, as mentioned. And here, I draw your attention to our cash position on October 31 was $13.9 billion. This is a significant reduction. It was $20 billion in the end of 2017. In observing the methodology to establish a minimum level of cash and considering that we have access to $5.9 billion in revolving credit facilities, it is possible to have a cash position that is sufficient to cope with the next four years of amortizations of the debt.

On Slide 16, we bring you the status of our partnerships and divestment plan. We highlight cash of $5 billion inflowing and a total of signatures in this 2017-2018 of $7.5 billion of contracts signed. This is compared to the target that we have established of $71 billion in the two years of 2017-2018.

We have some interesting projects that have been suspended for legal reasons. One of them was TAG, the oil pipeline network; and others are refining partnerships, Araucária Nitrogenados and UFN-III. But our partnerships and divestment program continues. We have a number of projects at an advanced stage. Many of them already signed, some in a binding phase and some that we launched a teaser, they are nonbinding. And it's important to highlight that divestment realization is below planned because of this legal ruling that I mentioned, but the program is progressing, and we intend to continue with this program as part of the integrated management of the company's portfolio.

On Slide 17, we highlight some partnerships. Partnerships, as I mentioned in the beginning, with Equinor for wind – offshore wind power; with Total for solar, onshore solar and wind power; with CNPC. We disclosed to the market a letter of intent in July of this year, and an agreement regarding the business model in October, defining 20% share of CNPC, 80% for Petrobras, either for Comperj refinery or for the Marlim cluster. We continue to negotiate this partnership. In addition, the partnership with Murphy to operate in the U.S. Gulf of Mexico.

On Slide 18, we continue with cost control discipline. This led to a reduction in general and administrative expenses by 6%. BRL 6.6 billion of G&A expenses reflecting a lower spending with consulting, IT, administrative services to third parties. Lifting cost in dollars was reduced with lower workovers in well, in addition to depreciation of the dollar. Most of this cost is in dollars. On the other hand, there was a higher government participation given the higher oil price. Refining cost dropped 4% in reals and 15% in dollars because of measures to implement an optimization of our spending.

And we have, on Slide 19, greater expectations for 2018. We are working with an estimate of $30 billion of operating cash generation by year-and, BRL 7 billion of cash coming from divestments. And we have received $5 billion of the $7 billion. In addition, we are reviewing our investments for this year. In spite a higher realization of investments in the third quarter, we are reviewing this value to $13 billion when it was previously $15 billion and $6 billion of payment of the interest, and this is our best estimate until the end of the year.

Speaking about some operating highlights, I would like to explain the situation of production. We are reducing 6% production compared to the same period of last year. And you can see the number of barrels of oil equivalent a day. The explanation is a decline. We have mature offshore fields where we have new wells planned to manage natural production decline, and we are making adjustments and in the process of water disposal in 28 platforms, so we have to reconcile the start-up of new wells with these improvements that are being made in the platforms. Another factor that explains this is divestment, divestment occurred for Parda, Roncador, explaining part of this. We had announced this in the beginning of the year when we spoke about the production goal for this year.

Another important factor was the concentration of stoppages in the third quarter. We had the end of the early production system of Tartaruga Verde and Itapu. And we had works on Route 1 that caused the stoppage of Mexilhão platform that impacted production in the third quarter. In this quarter, we had double stoppages regarding the third quarter, and this explains, in part, the results.

On the other hand, as a positive, we expect the ramp up of new platforms that have started up or are about to. Now the ramp up phase of those that started up of Campos dos Goytacazes and Tartaruga Verde P-69, P-74 and P-75 that is about to start operating, today or tomorrow. And these platforms, at a ramped up phase, will offset this decline in the effect of these stoppages and divestments as mentioned.

On Slide 22, I'd like to highlight the high productivity of pre-salt wells. Here, we bring average production per well. This is August 2018 average. So Sapinhoá, three wells with an average production between 27,000 and 30,000 barrels of oil per day. Lula, six wells. Average production, 32,000 and 38,000 barrels a day. And Mero, 39,000 barrels a day. That's a highlight. This high productivity results from the design of wells for higher flow rates, so we use flow lines with a larger diameter or gauge. Also we use alternate water/gas injection. So since the very beginning we started with a producing well and an injection well and a greater reservoir characterization, which points to an optimal location of each one of the wells. All of these factors added together combined lead to a higher productivity in the pre-salt. We show here Búzios on the right, where we expect high productivity.

Here, on the following slide, we talk about Mero productivity. In October, we finished the Extended Well Test in the area using FPSO Pionero de Libra. This was the first vessel that is able to inject the whole gas produced. This was the Extended Well Test and we achieved a high productivity confirmed for the field. We expect four platforms with a total production of 180,000 barrels a day for the definitive system for Mero.

On Slide 24, we highlight our exploration effort. We illustrate with Peroba. Peroba is an area acquired in a shared production agreement in January of this year. In nine months after signing, we started drilling the first well using this drilling rig NS-42. And just for comparison's sake, we compared with Lula, which was Tupi in the beginning. It took 16 months to start drilling. In Peroba, though, in just nine months, showing a significant exploration effort by the company.

Here, on Slide 25, we highlight the three new operational systems and the fourth that is about to start operation. P-74 at Búzios. Campos dos Goytacazes at Tartaruga Verde, 69 at Lula, these are operational and at a ramp up phase. And FPSO P-75, this should start operating today or tomorrow. It's important to highlight that three – in three out of these systems, Petrobras has 100% working interest and that this is going to benefit fully the company with the ramp up of these systems.

On Slide 26. In addition to these four systems, we have the new systems, P-67, that is us arriving at location. In 30 days, it should arrive at location. It should start producing by year-end. P-76 at Búzios 3. It should arrive at location in December of this year with production starting in the beginning of next year in January. Búzios 4 with FPSO P-77 and P-68 at Berbigão and Sururu. And these two platforms should start producing in the first quarter – in the first half of next year.

In addition to these 4, there are three others under execution, Atapu 1, Sepia, Mero 1; another five in the phase of contracting; and two projects at the planning stage. It's all included in our business and management plan.

On Slide 27, we talk about the ramp up process as mentioned. We celebrated the installation of the 100th subsea manifold. It is the 16th in the pre-salt area. In this chart, we show the number of wells already completed or wells that should start operating in 2018 are completed. For 2019, most of them are completed. There's a small part still to be completed. We are counting not only on these wells but on all the flexible flow lines, and umbilicals and support vessels to enable the ramp up of the platforms as soon as they start up operations.

Next, talking about refining operations. Talking about the downstream segment. Here, we highlight a reduction in the refining cost. As mentioned, a 4% reduction in BRL and 15% reduction in dollars. It is important to mention that Petrobras refining park is today at the same level of the best refiners worldwide in terms of cost. This is confirmed by Solomon, a bench – an international benchmark consulting. They put us in the first quartile among the 25 top refiners in terms of cost according to this benchmark study.

Moving on, we highlight higher efficiency in logistics operations. High integration between E&P and downstream. In terms of ships to offload oil from the platforms, we have been handling these operations at lower cost and with lower risk as well. So we reduced the risk of stopping production. We are working with a higher reliability. Operational reliability greater than 90%. This translates into higher efficiency of our logistics operations.

Regarding our sales volume. We had a reduction in total volume, but we draw your attention to the increase in the sale of diesel. We increased from 661,000 to 714,000 barrels a day compared to last year. This is offset by a loss of market of gasoline to ethanol. This means, lower sales of gasoline and lower sales of naphtha to Braskem and their of oil products and the reduction of sales volume, so to say, that our share of National Oil. In the throughput, it continues at a higher level. We had a reduction in the third quarter because of the loss that we had at Replan, but operational availability of the refineries in the nine months of the year continues at a high value.

We talk about market share. We – in September, our market share was greater than 90% with diesel or gasoline, and a utilization factor of our refineries of 75% in September. A lower level because of the accident we had at Replan, as mentioned. We had a recovery, a significant market share recovery in the third quarter.

Finally, I'd like to highlight our trade balance in terms of exports. This was very much in keeping with last year. In term of exports, there was a reduction in oil product exports because of the lower production. It was a reduction of oil exports, but increase in oil products exports because of a lower sale of oil products in the domestic market. We maintain – we remain at the net balance of 272,000 barrels per day. We remain at the net export in terms of natural gas. We also see stability, about 80 million cubic meters a day. All we had in last year was a change in the profile with greater input of LNG because of the lower availability of gas also impacted by the Mexilhão downtime. Ad in terms of natural gas demand, there was an increase in the nonthermoelectric sector.

The result of the natural gas segment was impacted by the loss of credits expected related to the electric system. It has to do with the supply of gas to the North region. This was responsible for the operating loss in the segment of gas and energy.

And finally, we would like to highlight the position of our refining business regarding the IMO, International Monetary Organization. Talks about the sulfur limit for bunker. According to these rules, we have to achieve 0.5% of sulfur by 2020. And here, we highlight the characteristics of the pre-salt oil profile. In a sample from FPSO Angra dos Reis. Our crude oil has a sulfur content of 0.03%; direct distillation residue has 0.5% sulfur.

So today, our direct distillation residue is already adapted to the IMO 2020 rule. In addition, companies that do not have the residue adapted, they need to mix with average distillates. And Petrobras is well-positioned to capture middle distillates because we have been investing, in recent years, in many coking units. eight of our 13 refineries have coking units. And these are units that convert residue into middle distillates. So with this, Petrobras is very well-positioned in 2018 to comply with IMO rules that will be in force in 2020.

And with this, we complete the presentation. We end the representation. Thank you very much.

Question-and-Answer Session

Operator

The Q&A will now get underway. Each participant will be limited to at most two questions. Questions should be made consecutively so that executives may enter them afterwards. We kindly ask you not to use the speaker phone. The questions made in English will be heard in the original language by all participants and answered by the executives in Portuguese with simultaneous translations to English. [Operator Instructions] First question, Bruno Montanari, Morgan Stanley.

Bruno Montanari

Good afternoon. My first question is for Solange. As a follow-up from the press conference, I found it very interesting the comments that some units are being tested to support the flow rate of up to 58,000 barrels per day. And seeing the numbers that you presented for flow line in other fields, should we expect, for the maxed FPSOs those 69, 75, 76, if we can see a flow rate more between 40,000 to 50,000 barrels a day? And the second question about the hedge policy.

If you can tell us a little bit how your experience has been so far. And if we could may be see the company broadening the horizon of the hedge from 15 days to maybe 30 days, and also increase that for diesel may be as a solution for the end of the year. And very quickly, the third question about CapEx. Compared to the original budget of BRL 15 billion, this new value should be for 2019 or is it due to the efficiency or relocation of some projects? Thank you.

Rafael Salvador Grisolia

Bruno, this is Grisolia. Thank you for your question. Let me answer the two last questions and then I'll turn it over to Solange. About the gasoline hedge, we're going through a learning curve. Our first experience with hedging and gasoline and what we can offer to consumers, to our clients was adequate. We are able to do what we proposed for ourselves. So we are quite happy with the use of this option for the company of using the hedge. From everything we've seen until now, the maximum term in terms of the gasoline for 15 days. This has not change.

So we had with the North Sea technical conditions to extend this term, and we're still analyzing possibly for oil products or diesel. Your third question about the CapEx for this year, the question of cash generation for this year, $13 billion. One, we're talking about the PNG. The plan for the next five years in the beginning of December. We will talk more about this. But certainly, it's not CapEx that will not be invested. There's relocations to be done, but we will give you more details when we present next year's plan. I'll turn over to Solange.

Solange da Silva Guedes

Good afternoon Bruno. Regarding your question about the productivity of wells that I talked about this morning. Our history shows that we are making advances in engineering new flows at this project. What we do is sometimes we have leaps. We're going now from the conception where the diameters of common wells is six inches, and now we're moving to an eight-inch conception. Some projects have this design in some wells. And we'll be testing that as the projects are implemented.

The solution needs to be tested, some measurements need to be taken as regards how the units and our equipments behave with such high flow rates. And from there, we'll extend it to entire project with these designs, and in the future, we will certainly seek to maintain whole projects with this new rate. This was tested in Libra, as I mentioned, in the extended test that was concluded in October. And we have the beginning of the application [Technical Difficulty].

Operator

Excuse me, ladies and gentlemen, please hold. Mr. and Ms. speakers, you may continue. Thank you.

Rafael Salvador Grisolia

I apologize for this issue. Let's continue. We can move on to the next question please.

Operator

Gustavo Allevato from Santander.

Gustavo Allevato

Good afternoon. I think that the call was cut off for everybody. Just to try and understand the costs. I wanted to understand from Solange if there's a target for cost reductions to 2019, considering the start up of this new asset sales with a higher productivity as you were explaining in the previous question. And if you could repeat your answer, I think it was – it dropped for everyone.

And the second about divestments, Ivan talked about it in the press conference this morning, considering the suspension of the processes that won't be for this year. But will this be taken to 2019 forward or is it on hold? I wanted to understand a little bit better.

Rafael Salvador Grisolia

Gustavo, it's Rafael Grisolia again. Thank you for your question. I'll turn over to Solange and give it some time for everybody to reconnect. About this divestment, it's a little bit of what we've been talking about, considering the projects that have been announced, they remain. The projects that are announced and suspended, as we have already communicated with this review that we're doing due to the Supreme Court's decision. All these projects continue both as suspended and we're working on the legal aspects as well as the others that we have announced at the different phases. Again, we'll be discussing at PNG about the timing and how do we foresee this and the cash inflow, but none of them will be out – or left out of portfolios and the management – active management.

Solange da Silva Guedes

Gustavo good afternoon. Let's see if I can give my answer until the end this time. You referred to the costs and the expectation for 2019. What we're seeing in a larger scale in the second half of 2018 that will also occur in 2019 and the first half are the entry of many units. And when they start up until the end of the ramp up, we don't see a significant cost reduction because they come in at full costs and the revenue is progressive.

So yes, we will try what you talked about, a significant reduction in our lifting costs, but at the end of the ramp up for this units. But I think it will be more towards the end of 2019 and more completely in 2020. This is our best expectation. I'll repeat a little bit of the rationale that I was answering to Bruno before when the line was cut. I think part of the – listeners didn't hear all my comments about what we're engineering, and better characterizing our reservoirs, and our conception of wells and subsea systems. So that we have the productivity of the pre-salt, we have a new generation of wells now in 2018, which are a result of this new equipment that has been qualified. And we're testing them in some projects, monitoring their performance so that later we can extend them to the large scale and new projects. And of course, we'll continue to seek this effectiveness of maximizing productivity of those pre-salt wells in future projects.

Gustavo Allevato

It was very clear, Solange. If I can just add a follow up to director Celestino. I'd like to understand about the stoppage at Replan. Can you quantify how much Petrobras had to spend in imports and how much of these additional costs can be carried to the fourth quarter?

Jorge Celestino Ramos

Gustavo, about the downtime at Replan. At Replan, we have two sides of units, the crackling – catalytic cracking unit and the atmospheric unit. Each one with capacity of 33,000 cubic meters per day. These units – one of these plants is what suffered the damage from the accident with distilling and crackling outside. And the crackling unit that produces gasoline will be up again until the end of November and the distilling will be by the end of January. That's our best expectation.

The next quarter, considering that the market is close to 1.8 million barrels at the peak in November, what we did was to rearrange the other refineries and the feedstock of the other refineries, especially Sao Paulo, using with that occurrence at Replan in order to try to minimize the impact of the imports. And we did that especially in October, which is the peak month for imports, and we'll see that the market starts to decrease in the import numbers or the need for imports already starts to decrease. And with that, we've been able to mitigate import costs.

Operator

Next question from Regis Cardoso with Crédit Suisse.

Regis Cardoso

Good day everyone. Thank you very much for taking my question. When the new management took over, Petrobras was in the eye of the hurricane of operation Car Wash. The balance sheet was not published, you faced a liquidity issue and among those several achievements, including pricing policy, a change in corporate governance. There is one in particular that drew my attention, which is diligence in terms of deciding on investments, and this impacted the liquidity of the company.

So the question is, do you see any risk and opportunity maybe to substantially increase your CapEx level in the future? And the exact accurate numbers are not very important, you're going to discuss this in the business and management plan. But I'd like to know about investing and allocating capital in refining with the Comperj project, and perhaps in the natural gas chain and NGL projects. So this is my first question, about CapEx. And my second question has to do with the pricing policy. I would like to understand, it seems with Rafael's prior question, it seems that you are happy with the gasoline hedge policy. Petrobras, for a long time, stayed above the import parity price because you had applied a hedge policy. Aren't you afraid that perhaps if you will apply this in a recurring, repeated fashion, this could be used in an opportunistic way? Isn't there a way to transfer this beyond refiners and importers?

Rafael Salvador Grisolia

[Foreign Language] Regis, thank you for the question. Your first question – this is Rafael Grisolia. And then afterwards, Jorge will compliment regarding the pricing policy.

Nelson Luiz Costa Silva

Regis, this is Nelson. Thank you for the question. Regarding the plan that we are finalizing soon or we will disclose it in November is, you can expect a greater cash availability. As Isabela mentioned in the introductory remarks, we have an ascending trend in our cash generation and a declining cost trajectory, so we can expect greater availability to invest in the future, but I cannot give you any more details on that for now. And this is the thing across the oil and gas industry that is restructuring itself after the dramatic reduction in oil prices.

We are showing very good and positive financial discipline in these restructuring efforts. Petrobras is not an exception in the industry. So in the future, yes, the point will be our choices and how we will make our choices maintaining our capital discipline and of course, our economic rationale. I will quickly comment on natural gas that you referred to, and then Jorge Celestino will speak about refining.

One of the things in our strategic plan is the company increasing its share of natural gas in our portfolio. We know that we have limitations in Brazil because of the geology. And we will probably have to look into other alternatives, not exclusively in Brazil in terms of the integrated gas chain but, yes, this is in our radar. And this will be addressed in the new strategic plan and in the 2019, 2023 business and management plan. I will turn the floor to Jorge Celestino.

Jorge Celestino Ramos

Regis, regarding divestment in refining. In the prior business management plan, we have said that investments in refining, because of RNEST, would happen through partnerships. So yes, we are seeking partners to – for the investments in refining. We recently signed a partnership with CNPC. For the Comperj project, also considering the demand curve for oil products in Brazil, the interfaces with RenovaBio project.

So we're looking into this and we will be finalizing this along the 2019, 2023 business and management plan. Regarding our pricing policy and our hedge policy. I think Rafa addressed the big question of fixing the hedge period for a little longer period. You have stability and then you have – you can have arbitration.

So this is something that we have been taking into account in our commercial policy mechanisms so that our prices will always be competitive and to bring the best result for the company. So this analysis of hedging duration and how to deal with these instruments to reduce volatility. Everything is taken into account considering the possibility of arbitration.

Regis Cardoso

Thank you, Celestino. If I may, want to ask a follow-up question regarding Comperj. Is it possible that Petrobras will allocate more capital as part of this partnership with CNPC? And the reason I ask is because the percentage in the material fact that you disclosed of 20%, I think it sounded very little.

Rafael Salvador Grisolia

Regis, this is Rafa Grisolia speaking. Again, it's a joint project. The CNPC project involves CNPC participating its share in our Marlim area and consequently, in parallel to that, concomitantly, their share at Comperj. So the problem is that most likely we will have an inflow of capital to Petrobras with that arrangement.

Operator

Next question with Andre Hachem with Itaú BBA.

Andre Hachem

Thank you for taking my question. My first question has to do with P-74. It had its first oil in April, and until now you're running with two interconnected wells and a production of, more or less, 35 barrels. Could you speak about the dynamic of ramp of this platform? Why is it taking longer than expected? I remember that you discussed the average ramped up – ramp up time was 12 months, so why are you falling a little below the expectation?

My second question has to do with the subsidy program. It is expected to end on December 31. And as of January 1, given the current situation, this would mean a relevant increase in the diesel price. How are you dealing with this? What are you thinking about this? Are you going to adjust these prices gradually because I mentioned that the government will have a say on this? Are you discussing with the government the end of the subsidy program?

Rafael Salvador Grisolia

Andrea, this is Rafa Grisolia again. Thank you very much for your questions. I'll start with the last one and then I'll turn the floor to Hugo who will speak about the ramp up. Regarding the subsidy program. I'd like to stress that Petrobras continues its pricing policy that presupposes that we will maintain competitive prices for all of our products, vis-à-vis, exported products. This remains our primary goal, and this is what drives the profitability of the company and that is dictating the company's profitability as it has been in the recent times. At Petrobras, we understood that the subsidy translates exactly that. It that translates into profitability in terms of exports parity, so we will continue as we have done.

Once the subsidy ends, again, we will have to look for the parity and we have to look for the right margin. And we will be managing our pricing policy accordingly even when the subsidies are not there anymore. Of course, Petrobras is participating in the discussion regarding imports and mentioning our experience regarding the management of that topic. We were collaborating with the government before and we are collaborating with the transition team of the government to see how we can address other components in fuel prices, which is not generated by Petrobras, but which is driven by all of the taxes on fuels.

So we're contributing to this discussion, and we expect that we're going to have more information before the end of the subsidy program. I will turn the floor to Hugo, who will address your first question regarding P-74 ramp-up curve.

Hugo Repsold

Hello Andre. Your question was actually very good big, because if we analyze the start up of production, the start of the ramp-up curve is the most delicate period. For us to go through the full ramp up, the first stage, before we even connect first oil, is to have a gas injection well and to have the whole gas system for the platform commissioned so that we can inject gas, then we start burning. And we can proceed with the ramp up connecting all of the other wells, the oil wells and perhaps another gas injection well.

At P-74, in particular, during the commissioning of the gas system, which is not entirely related to this project, during the operation, we had to carry a little bit of liquid to the gas system. So we needed to clean it all up so that we could, again, inject gas. In resuming, when we resumed the gas injection, we will resume interconnecting all of the wells.

So this was a delay because of an operational issue, but it didn't interfere with the ramp up as a whole. We expect to catch up, but this is part of this process of commissioning in our pre-operation. We have to test all of the possibilities. And we can only do things when everything is 100% perfect, which is the case of P-74.

Andre Hachem

Perfect. Thank you very much.

Operator

Next question, Vicente Falanga, Bradesco.

Vicente Falanga

Good afternoon. I had two questions. Is it possible to see what are the next gas processes for Petrobras to be able to move on with E&P and sale? We saw there was a jurisprudence of a sale of a majority stake of Petrobras. I would like to know if there is any detail about that. And a second question in asset sales, sale of assets. Can you give us any idea of any process of the sale of other large assets? Any expectations for concluding those processes?

Unidentified Company Representative

Vicente, Rafa Grisolia. Thank you for your question. There's a whole legal strategy about this processes that are suspended involving TAG and our complex refineries which we are following. There has been a public hearing and the minister that made that decision on that – there is a legal strategy. There's a step-by-step ritual that we are following, that I think we will soon have a position on that.

So that's why definitely the processes are suspended. We'll bring the subject also when we come to the announcement of our business management plan in the beginning of December, and we'll be able to give you more details with the new information we'll have by then. But as soon as we have more information and more definition in our legal strategy, we will communicate the market. About the other processes that are not suspended, they continue on their regular stages of negotiation.

So we have important phases for the shallow water and offshore fields that we are in different stages of negotiation. We may have some development soon. There's the aspect of the negotiation that the public negotiation that Lyondell's offered to Odebrecht about this stake at Braskem. But as we said this morning, we are waiting for the official determination and the conclusion of the negotiation between the parties so that we can communicate this and for them to make a decision in an analysis of what Petrobras' position will be.

So it is on hold and expecting definitions. And we understand that all these issues will develop soon or in the weeks, maybe even before the end of the year with some of the projects will may be able to have some announcements to make before year-end.

Vicente Falanga

Excellent, thank you.

Operator

Next question, Gabriel Barra, UBS.

Gabriel Barra

Thank you. The first question is about one of the top metrics. One is about indebtedness and the other is about the accident rate. I wanted to know if we can expect for the next business plan, a metric about or the target about possibility of return?

And the second, a follow up on Andre's question. The diesel subsidy will, in theory, end in December, and we don't know how this transition period will unfold. So my question would be, how is Petrobras looking at that? And if there's any possibility of replicating the hedge for gasoline in the diesel policy? Thank you.

Rafael Salvador Grisolia

Gabriel, this is Rafael Grisolia again. Thank you for your questions. As we have informed in the Investors Day, the top metrics of the company, certainly TRI is a metric, it's a value for the company, and this target remains. We are working very strongly on this since we're close to the threshold and we will maintain this metric in our plan. Definitely, the net debt adjusted EBITDA ratio is an important metric that will remain. The company needs to seek the optimization of its capital structure.

And when we compare with our global direct competitors, so the size of the company also needs to have a lighter capital structure. And we will probably add a third metric, a top metric that would be the return on the capital invested. So that will help us manage our discipline in investment decision. And as we talked about this morning, we have an active portfolio management. And we'll continue with an investment management with investments that are not necessarily connected to a strategy and have a lower return on capital invested.

About the subsidy, I don't know if I'm being repetitive, but again, we're working on this topic. We're learning from the option that we chose to use at specific points for that hedge policy or hedge and derivative instruments for all our products, to extend the stability to our clients. We're always depending on product. And there's different applicabilities and it might not be viable for some products. And there's another panel discussion about this in the end of subsidy, which is to have a clear, open agenda with a communication that may contribute to a possible government policy if the government determines that they want to maintain a policy in this sense or there may be a possibility of continuing with the subsidy, but it's more likely that it will not continue.

So within the fuel price structure, the Petrobras share is smaller and regarding the price depending on the type of fuel. And there's an important share that is the tax adjustment, and we'll see how we can contribute to an analysis if the government wants to develop a government policy for that. So we will contribute to these discussions.

Gabriel Barra

Thank you.

Operator

Next question, Fernanda Cunha, Citi.

Fernanda Cunha

I lost my connection with the call a few times, so I may be repeating someone else's question. But my first question about this agreement with CNPC and Comperj and the Marlim field. This transaction, does it expect any type of relevant cash? Or is Petrobras waiting for it to be carried? And is there room for other types of transactions with upstream and midstream in other assets? So that would be my first question.

And the second is about the Transfer of Rights. I wanted to know if, in the event that it is approved in the tonnage, that proposal about the Transfer of Rights, what would be the next steps? Would it be the resolution of the renegotiation of the contract? If you can explain to us a little bit about the timing just to give us an idea of the next steps in that area. Thank you.

Rafael Salvador Grisolia

Fernanda it's Rafael Grisolia. Thank you for your question. About your question on the partnership with CNPC, as we announced, it involves two joint ventures, one to start in the Marlim area and the other is specific for the investment of Comperj. We also announced that we will validate with the detailed study to validate numbers behind the partnership. But the indications of the share of each one will always be in that range that we announced 80% of the money investment.

Operator

[Operator Instructions]

Rafael Salvador Grisolia

So 80% for Petrobras and 20% for CNPC. And within those numbers, if we put the figures behind it to validate, there will be an adjustment of contribution and rates. And a likely indication is that, in time, the capital allocation is for cash inflow to Petrobras, considering the dimensions of 80-20 for each one of these two large projects, Marlim and Comperj. For the Transfer of Rights, I'll pass on to Solange.

Solange da Silva Guedes

Good afternoon Fernanda. Regarding the renegotiation of the Transfer of Rights contract and the bill that you mentioned, there is another fact that's occurring simultaneously, that CNP, in a resolution, issued a resolution 12 of 2018, recommended the minutes of this contract, of this amendment, the draft of this contract, the CGU. And then with – so in order to continue in receiving the due approvals of this document, we need to wait for this year's pronouncement about the draft of – that have been submitted to that agency.

Fernanda Cunha

But what do we have any idea of a time line for that?

Solange da Silva Guedes

No, we do not have a time line for this.

Fernanda Cunha

Thank you.

Operator

Thank you very much. We are now ending the question-and-answer session of this conference call. I turn the floor to officer, Rafael Grisolia for his final statements. Mr. Grisolia, please go ahead.

Rafael Salvador Grisolia

Before anything, on my own behalf, on behalf of Ivan Monteiro and the whole management, I would like to thank the participation of all of you. We have to particularly apologize for the technical problem that some of you faced when trying to connect via webcast. We promise to improve the technical aspects for the next conference call. This was a significant issue. We apologize.

As always, the presentation will be available at our website as well as the audio of this conference call in Portuguese and in English. So if you need further clarification, I will be available, and the IR officer and the whole IR team will be available to address any further questions you might have.

Again, I would like to thank all of you for participating. We are very happy with the results achieved. The company remains on the right track. And in our next meeting, we will announce our five-year business and management plan. So thank you very much for joining us.

Operator

Thank you, ladies and gentlemen. The audio of this conference call for replay and slides presentation will be available at Petrobras IR website at www.petrobas.com.br/ir. This concludes today's conference call. Thank you very much for your participation. Please hang up your telephones and have a great day.