巴西石油 (PBR.A) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to Petrobras conference call to discuss fourth quarter '06 and year-end 2006 results. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. Today with us we have Mr. Almir Guilherme Barbassa, CFO and IR Officer, and his staff. At this time I would like to turn the conference over to Mr. Raul Campos, IR Executive Manager of Petrobras, who has some additional comments. Please go ahead, Mr. Raul.

Good morning, ladies and gentlemen. Welcome to our conference call to discuss fourth quarter and 2006 fiscal year results. We have a simultaneous webcast on the Internet that can be accessed at the site, www.Petrobras.com.br/ri/english or portuguese. Additionally on the webcast registration screen you may download and print the presentation, and download the financial market report. Also, you can send your questions to us by Internet, clicking on the icon, Question to Host, anytime during this event.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Petrobras management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Petrobras, and could result -- could cause results to differ materially from those expressed in such forward-looking statements.

Finally, let me mention that this conference call will discuss Petrobras' results prepared in accordance with Brazilian GAAP. At this moment we're unable to discuss any issues related to U.S. GAAP results.

The conference call will be conducted by our CFO and Investor Relations Officer, Mr. Almir Guilherme Barbassa. He will comment on the Company's operating and financial highlights, and the main events during this quarter. Afterwards he will be able to answer any questions you may have. Mr. Barbassa, you may begin.

Good afternoon ladies and gentlemen. It is a pleasure to be here with you, and have the opportunity to talk about Petrobras' fourth quarter and 2006 fiscal year results.

Starting the usual disclaimers have been presented by Raul. We have many forecasts that may not realize. But let's go on.

Our production in Brazil increased by 5.6% during the year 2006 when compared with 2005. And the platforms, the production units, P-50, FPSO Capixaba and P-34, they gave the most of the contribution we had to increase this production.

Looking at the total production of Petrobras, including gas and international, we had an increase of 3.5% since the end of last year. And in the last quarter we had 1.4%. And the main sources of production for the increase were the same units.

But in the international arena we have some problems in Argentina with strikes and lower production of gas in Bolivia in December due to the pipeline that were fixed after the problems that were caused by the rain during last April. And there were less demand for gas at the end of the year, gas that comes from Bolivia, so a smaller production was done in Bolivia at this time.

E&P oil prices. As you can see we had second and third quarter high prices, and the fourth quarter a big reduction in price. This has caused us some problems in the fourth quarter, as you can see following the presentation. Our inventories that were used during the fourth quarter were [formed] with price of second and third quarters. So the cost of goods used to produce oil products during the fourth quarter were more expensive than the market price. And at the same time, all the oil produced by E&P were sold by the fourth quarter price, because this is immediately sold.

In the refining and sales, we had a reduction on the domestic production of oil products, and this reduction was mainly due to the programmed stoppage of REVAP and REFAP and REMAN. REVAP and REFAP are two large refineries in Brazil. REMAN is smaller, but REMAN was stopped during most of December.

These were programmed but this caused us a reduction on the production, as well as in the utilization of the installed capacity, that fell to 85%. We had during the year a very good average of the installed capacity utilization. But at the end of the year last quarter it happened that it was -- is smaller.

The volume of oil sold was less than the third quarter. This is a seasonal change. The third quarter is the period that most of the agriculture is -- the use of fuel for agriculture is greater during the third quarter. So fourth quarter is not as big, and then reduced the volume of sales.

The domestic crude oil as a percentage of the total oil processed in Brazil reduced in the end of the year, mainly because the relative price of crude oil -- of fuel oil, sorry -- of fuel oil. Due to the fact that the winter came late to the United States and Europe, less fuel oil were used, so fuel oil price were depressed when compared with diesel oil, for example. And we need diesel oil in Brazil and we export fuel oil.

In this situation it was better not to process the Brazilian heavy crude that yield lots of fuel oil, and instead importing the crude -- light crude to produce more diesel in the domestic market. This was a switch that we did exchange from have the crude national oil for light crude imported to produce more diesel and less fuel oil.

The average realization price, we remain stable since last price increase of diesel and gasoline in September of '05. And this has shown that we have sold during the year 2006 the oil products in Brazil in line with the prices that was in place in the United States. And as you can see, later on the profits of the Petrobras is in line with other big oil companies. In the fourth quarter we had our price in Brazil in line with the American -- the U.S. market.

Income statement of the fourth quarter compared with the third quarter. In terms of revenue we had a decrease in the fourth quarter. And this is due to two facts. One is price, and the second is volume. So there were a slight reduction of 5% in the net revenue. And the cost of goods sold, they remain in line with the third quarter because we had the transposition of inventory costs to the fourth quarter.

The EBITDA had an impact on the increase of operational costs. And we're going to explain the operational cost in the next page. And at the end we had a decrease in the net income reaching to R$5.2 billion.

The operational expenses, we had the sales expense in line with the previous quarter. But G&A, we have an increase the fourth quarter usually. They take all the personal expense due to the collective negotiation of salaries that happens in September. And this cost comes to the cost accounting at the end of the year when the negotiation (indiscernible) is concluded. Beside that, we had an increase in number of employees during the year, what caused us an increase in G&A as well.

Beside that there is the exploration costs. Exploration cost is the write-off of dry wells and noncommercial wells, and seismic costs as well. And this happens in the fourth quarter mainly in the U.S. and Bolivia, what increased the total exploratory costs to reach R$800 million in the quarter.

Taxes. We had a slight increase. Not so slight. 35% is a large increase, but this is due to the fact that we had the opportunity to pay out many debts we have with the states in Brazil, where good opportunities were offered to Petrobras to pay this debt that was being, most of them, under litigation.

The quarter to quarter change of E&P results can be -- it is quite clear here the price effect, as the production of E&P is sold by the current price, either to export or to the refining segment. So they feel their price change immediately.

There were some reduction in the cost of goods sold, but not big enough to compensate for the price effect on the net revenue. And volume has increased, as we had shown, by 1.4% in the fourth quarter. It still gave us some extra earnings, but not enough yet to keep the same operational profit of the third quarter in the fourth quarter.

In the downstream, the changes were bigger, but the net -- after all the net effect of price and average costs was the reason of change in the operating profit of the revenue -- of the downstream area. And, of course, there were some effect as well due to the reduction on the sales on the fourth quarter, but the price has reduced as well.

But the price was the main reason of price and costs. But costs reduction due to the reduction of the crude oil gave to downstream the main portion of the operating profit, additional to the third quarter.

The net profit quarter to quarter is basically the reasons were -- what we have explained. A smaller realization price in the fourth quarter and (inaudible) cost of crude oil was not low enough to compensate for the reduction on the income.

Operating expenses as well had some increase. It was partially compensated by the financial expenses that was smaller during the fourth quarter. Just to remind you that in the third quarter we pay out part of our international debt, buying back some of the more than R$1 billion --- US$1 billion of debt. And the excess over par is because a loss during that quarter. In the fourth quarter there were no this kind of losses.

Looking at the sources of this profit. When compared third and fourth quarter the biggest loss came from E&P, and this is due to the price reduction. Downstream has catch up somewhat, but not enough to offset the loss caused by price reduction. And international had some losses as well because we have explained international suffered from the oil price as well as E&P. But there were some cost recognition, mainly in exploration.

The commercial balance of exports and imports of Petrobras had a surplus of 93,000 barrels of oil per day exports greater than imports. But we had at the end of year our record of exports, 669,000 barrels of oil and oil products exported per day during the fourth quarter.

And most of it was crude oil. As I said, we exported more crude oil because we reduced the use of crude oil in our downstream activity. And this caused us to import more of crude oil -- light crude oil, that shows here also in the fourth quarter an increase on the light oil imports.

We have here a follow-up of our cash balance. How the cash balance is distributed among different kinds of currency or investments. And it is always tied to our obligations. So we use our cash to hedge our obligations position. We have increased our position outside Brazil of dollars. Part of -- so the special part of our cash at the end of the year was outside Brazil.

Leverage keeps track of decreasing the last three quarters. It lost 1% every quarter, reaching 16%. We have already approved a share buyback program that shall be implemented during the current year. The amount of US$2 billion to buy preferential shares. And they will be [considered] as bought.

And with the cash balance we had at the end of the year, R$27 billion, part of it was used during January when we paid R$4.4 billion in interest on our own capital, part of the dividend that is going to be paid during this year.

The cash flow statement shows that, regarding the volume of CapEx, capital expenditures, we're going to show detail later on, was a very big volume of capital expenditure during the year. Even though we had free cash flow that we saw financial operations could help us increase the cash balance to almost R$28 billion.

Investments, we reached a new record of investments in the Company, R$33.7 billion. This means 31% more than 2005. And we still keep our main destination of investment at the E&P, the exploration and production.

Most of the exploration and production is development of production where we have most of 50% -- most of the total proved reserves is still to be developed. So more than 50% of our proved reserves is undeveloped. So we are investing most of this capital to make these reserves make money, to monetize the reserves.

And we are dedicating a large portion as well, there is a good increase on the exploration expenditure. Looking for the future, trying to find new oil fields to keep our reserve ratio, reserve production ratio, and keeping the Company growing for the future.

Next the costs. Costs without government participation. There were an increase of 9% on the fourth quarter over the third one. And this is due to what all the industry is feeling at this moment. The industry is very active, so prices goes up, drilling rigs, specialized services and materials, and personnel as well.

And we had besides that new platforms going on stream. And these platforms until they reach the peak production, the average cost of production, these platforms, they are higher than the average of the Company, what makes the average higher for the period. But I believe this cost increase we have had during the year is in line with the international cost that all the industry is experiencing.

When we had government participation to the production lifting costs of the Company, we see that the total cost in the fourth quarter is slightly smaller than the third. The fourth is smaller than the third. And this is mainly due to -- it is due to the government participation that in Brazil is calculated according to the international oil price. For as the oil price fell down, the participation also had a decrease. And then we had a reduction on this lifting plus government participation. But, yes, the lifting cost I had already commented.

Refining costs. We had the same level of increase from third to fourth quarter. We had here a bigger impact on the personnel expenses due to the fact that manpower weighs more on the downstream in the refining process. And the fourth quarter is always the quarter that carries more the cost due to the fact that the decision on salary increase happens in September.

Finally, just for comparison, Petrobras had a very good performance in terms of profit, net income during the year of 2006, with an increase of more than 22% over 2005. And when compared with the other big oil companies that have already released the data, it shows a very positive, very good, at the top of the rank in the net income increase year-to-year.

When we look at the quarter, last quarter we had a not so good performance. And this was in part due to the criteria we used for inventory cost, and some other special points that we have raised during the presentation.

That is it, what we have to present to you. And we're here to answer any questions you may have. Thank you very much.

(OPERATOR INSTRUCTIONS). Christian Audi, Santander.

I had a couple of quick questions. First, on the lifting cost charts that you showed, Barbassa, showing the increase quarter over quarter, is it possible for you to give us a sense of that increase, or at least how much had specifically to do with the salary adjustments?

Okay. I will have Molinari from E&P will help us with this information.

We had an increase of US$0.60 from the third quarter to the fourth quarter on the lifting costs. US$0.32 were due to personnel. So most of them --- half of the increase was due to the personnel cost.

Do you have the rest of the other items, if you have a breakdown, because that is always very helpful?

It was mentioned by Almir. Services, drilling rigs, maintenance and [intervention] in wells, that was US$0.15. And then we have other items of US$0.12. This is most of the US$0.60 increase.

Great. Since I have you on the line, Molinari, because my second question had to do with production. Given the update you provided us with in terms of where the different platforms, what level they are producing at this point, do you think it is fair to say that although we're going to see an improvement in the first quarter in terms of production, that a bigger improvement will really take place more in the second quarter as opposed to the first quarter, given how the ramping up of the different platforms you are currently working on is looking like?

We are expecting an increase in production in February and March in this quarter. January we had a decrease of 46,000 barrels per day due to the stoppage of P-37, a planned stoppage for maintenance of the FPSO P-37 in the Marlim Field.

Yes, but the platform that has been put onstream recently, the P-34 FPSO at Rio de Janeiro and Capixaba, they shall reach peak production by [June] of the year. So up to mid of the year we shall have production increase, because we have the Piranema that probably starts producing before the mid of the year as well.

Yes, end of May.

End of May, so it will help somewhat. Then we have the field of (technical difficulty) that came onstream last week. So this first half of the year will be -- we expect to have production increase during all the time.

Then there will be the new platforms by September, the P-52 and the P-54. Two are to be installed in Roncador Field. They shall be starting in September.

Great. On the topic of inventory costs, you explained the reasoning why they had a big negative impact this quarter. Given what you have seen so far in January, in other words market conditions 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 '07?

[Paulo Altes], can you help us in this question?

Yes. It is correct. We can expect an improvement in the cost of goods sold in the first quarter of 2007, because we had the opposite movement that we had this quarter. Considering that the [benet] that we don't have this quarter, we will have in the next quarter. In other words, the decrease in costs will re-appear in the next quarter.

The very last question. As it relates now to import costs, Barbassa, again given your explanation as to why they went up in the fourth quarter, so far in January you have been following the same strategy, which would result in import costs continuing to increase into the beginning of the first quarter of the year?

Yes, at the beginning of January we were still following the same fashion, because it was economical advantageous to import light oil, process, and make diesel instead of processing the domestic oil to make more fuel oil.

But as you well know, the winter came on later, but came on beginning the mid of January. And this made the market react and increase; the fuel oil cost went up. So at this point in time I believe it is no longer economical to do what we have done at the end of the year. [Demar], do you have anything to add to it?

It is correct [not to do] direct percent. The price of the heating oil was lower in the fourth quarter, but now the price is already going up because of the winter. So it will be better for us to process our oil here, and then we will need less crude oil import.

Paul Cheng, Lehman Brothers.

A number of quick question. Earlier there you were talking about the negative impact from the liquidation of the high-cost inventory. Maybe I missed it. . Do you have a number you can share? How big is that negative?

Yes, the cost carried over from third to fourth quarter due to the higher cost of inventory that was formed in the third quarter was about R$1 billion.

R$1 billion?

Yes. This is the best estimate we have, R$1 billion.

It looked like that you did not have any tax benefits on the interest on capital in the fourth quarter. I just want to make sure that that is the case. Historically in the fourth quarter that you do have some tax benefit. I don't think that you declared anything in the fourth quarter.

Yes, we did declare half of what we declared in the third quarter. So the fiscal, the tax advantage, the tax gain in the fourth quarter was half of what we had in the third one.

So fourth quarter have nothing, because everything is declared -- was declared in the third quarter, right?

No, we declared -- how much we did declare in the fourth quarter was -- (multiple speakers)? The benefit in the fourth quarter was 670.

670?

Yes, 670. And the third quarter was double that. (multiple speakers).

You earlier mentioned about the contract negotiation, or the terms negotiation in Argentina, it impacted your production. Is that a onetime impact or that is going to be on an ongoing basis? Are we going to see the reversal in the first quarter?

The negotiation Argentina. Yes. There were two consequences on that strike we had there. One was the salary increase. And this is permanent. The second was production loss, a production decrease, and this is onetime.

How big is the production loss related to that?

Just a moment. We're going to check how much what it is. Argentina. We lost an average 2,500 barrels of oil per day during the quarter.

For the quarter it's 2,500?

2,500 per day.

We have seen in the industry a sharp rise in costs across the entire supply chain, whether it is in the upstream or downstream. And some of your international competitors that have indicated as a result they will slow down their investment program, particularly in the downstream side.

Wondering that -- have you guys looked at that? Does the cost pressure in some way impact your investment program outlook for the next two or three years?

We have established already our investment program in the downstream, and it is mainly directed to increase the complexity of our refinery to process more of the Brazilian crude in Brazil. And this is one of the best alternatives we have. And of course we are investing also in quality. This we cannot stop, because we cannot fall behind the industry in terms of quality, either to sell in Brazil or to export.

I'm sorry. I understand what your objective is in your investment. I guess my question is that in light of the tremendous cost pressure some of your competitors have decided to slow down their investment program to combat that. I just wanted to see if that consideration [has run through] you guys, or that you think, despite the cost increase, your investment program that you have laid out from several months ago in your five year strategic plan, you will just go ahead and not going to have any change on that. Indeed, I think you recently raised the capital spending for this year.

Yes. Okay. We are following this cost increase of course. And when it affects our projects we are still -- whether canceling, as we did with the two platforms that we have conduct a bidding process. And the price to build the P-55 and P-56 were well above what we were expecting, then we canceled that process.

And we are reviewing and looking for other opportunities, either technical or economical. And so we are following closely costs. And we do not approve a new project if it is not economical under our scenario of price.

Two final questions, if I could. One, if you can give us an update of where we are in terms of the trend, JV refinery -- the new refinery that you plan with PDVSA in Brazil, I am wondering that are we anywhere close? Is it still a go?

The second one is that now you are an investment-grade Company, what kind of cash balance level, or the balance sheet level that you will feel comfortable on a sustainable basis? Do you really need all the cash currently sitting on the balance sheet, or will you feel more comfortable that you have somewhat of a more reduced level? Thank you.

Okay. Regarding the refinery, we are still under negotiation with PDVSA. We did not finalize our agreement with them. But it is still going on, the negotiations. And we are, as well, going on with the basic designs of the refinery. This is the stage of the construction of the refinery. We are in the base -- working on the basic design. And negotiations with PDVSA, there is no final agreement as far as now.

And regarding the cash balance, the cash balance we feel comfortable is much lower than what we have today. And this is why we approved the share buyback last December. And the balance we have today was not the balance we were expecting. It was much better, of course to have last year's balance, but in this is due to the price or the market.

Is it possible you can share with us that what may be the comfort zone? Is it R$10 billion, or a bit less, or R$15 billion? Any number you can share?

I would say that it is about R$10 billion, the minimum cash balance we need.

Marc McCarthy, Bear Stearns.

I have three or four questions. Thanks for making efforts to explain all the inventory accounting. On the upstream, my question, Almir, is really as it relates to your planning. Lifting costs are far higher than you guys ever envisioned. Some related to the real, some related to the industry. You guys are going to revise your strategic plan in a few months. Will we see a number below $7, I guess is the question? That is the first question.

The second question is as it relates to the inventory balances and what you are suggesting to have, what all makes sense, that you have higher cost inventories flowing through -- higher feedstock costs from the third quarter flowing into the fourth quarter. However, your refining margins went up during the quarter, which was great. No question. It was very helpful to stabilize your cash flow.

But my question is really, can you give me a sense of how your level of inventory changed during the period? Were you able to in effect work through your inventory from the third quarter faster and capture some of the benefit of lower feedstock costs in the fourth quarter, effectively working through your average?

I don't know if that question is easy to answer or difficult to answer. And I might ask really just going forward if you can provide us with more color as to the number of barrels you have in inventory going forward?

The third question is as we relate to international, what happened at the Pasadena refinery? Can you -- it seems like it lost money. Was there a charge? Did it lose money? And what is the outlook there in terms of margins and upgrade plans?

Then you had significant dry hole costs within international. Can you tell us where they came from? I know that this is your area of risk capital, but you had huge exploration charges, but you didn't identify necessarily where they came from. I know you mentioned about Argentina and this and that. But I don't think that is really dry holes. I will stop there.

Okay. So many questions. Let me try to see if I recall all of them. Let's start from the end. The dry hole costs came mainly from the U.S. in the fourth quarter. The U.S. we [build expensive] wells there, and we had a dry well in Bolivia, not Argentina. I don't know if we had any one -- if I said, Argentina earlier, but I meant Bolivia. And there were some costs of seismic as well. So this is the main source of dry holes.

Pasadena. Pasadena, the average cost of refining in Pasadena is US$2.71 per barrel. And we expect to increase the complexity of the refinery to be able to make it able to process Brazilian crude.

Did the Pasadena refinery breakeven during the quarter, or you can't really tell from the consolidated numbers?

No, it presented a slight loss. But we still have some information to be confirmed, because beginning of the operation, new partner, and we have to fix all the procedures of information supply. And we don't have all the information for the quarter for this refinery. In due course during this year we will be producing a better figure.

I believe at this point we don't have enough of the information we could give you on these details. But, of course, when we bought it we have appraised all these questions, and we expect the refinery is going to produce some profit.

Just going back to exploration, Almir, the number was US$423 million from dry holes internationally. Right? That is half -- almost half of the total global -- almost US$1 billion of dry holes. This is from how many wells that were dry in the U.S.? I only know of Blackbeard.

Let me see here if we have this information. Blackbeard?

I guess my question is really is there anything in West Africa?

No, there are many -- Corpus Christi 743; Garden Bank's 243, number 1; and South Timbalier, [eccle] Blackbeard; and Garden Bank's 329, number 2. The three in fact, yes, they are four. And there's more amount for Garden Bank's 247. I don't know if this is well or is other kind of cost.

But dry holes costs here according to this list is mainly Garden Bank and the Blackbeard. But Garden Bank 329, number 2. And Garden Bank number 1 as well.

Is that something else going on there? The Garden Bank well was for your share was something like US$30 million or US$40 million.

Garden Banks. It was about R$80 million. And Garden Bank's 329, number 2 is R$120 million, US$56 million.

Right. You have total losses in 2006 of US$400 million.

R$400 million, not dollars.

No, this is -- your dry hole is R$920 million for 2006.

Total, including Brazil.

No.

Including Brazil.

Total is R$2 billion for the total year.

Oh, for the whole year.

Or just the quarter is R$400 million for international.

This R$400 million is the one I told you for the year -- the year, R$400 million. Yes. This is for the year. We don't have here the quarter. The number I told you is for the (multiple speakers).

Right. I thought Blackbeard was in the third quarter.

Yes, for the quarter. But there's no number of -- no wells here, it is just -- for the dry wells 235 in the fourth quarter international. And geology and geophys and seismic, 150 out of the [408] for the fourth quarter.

Got it. Thanks Almir.

And inventories, what was the question?

Basically my question was, you provided a very good recap about why you should have suffered a squeeze, or why the refining margins were not as good as they could have been, I suppose is really the answer.

But as you mentioned, you are carrying through feedstock costs from the third quarter which were much higher, and your price realizations in the fourth quarter were lower. And yet you didn't actually suffer a squeeze at all. In fact, refining margins went up from third quarter to fourth quarter. And I'm curious as to, if you worked through your inventories quicker in order to avoid being squeezed as much as you could have been?

Yes. The margins went up in the fourth quarter, but it should go up much more, because prices in Brazil were kept the same as before, except for the larger buyers, on naphtha and industrial oil and jet fuel. But for gasoline and diesel had no change in price in Brazil.

So the downstream should have done a very good profit on the fourth quarter due to that. Yet they did not get all the increase because of cost of inventory. Otherwise the results of downstream in the fourth quarter would be much better than -- and the margins were supposed to go up much more.

Then the last question was about lifting costs. Your outlook really for the strategic plan revision, will we see something below US$7?

This is a difficult question. But of course we take into consideration the cost when we approve the new budget. And all the new projects have to be profitable and a very-- on the hurdle prices. And as cost increases, this will be -- it will have a big influence on our future plans, and will be taken into consideration.

But so far we have no decision because we're not at this moment reviewing our plan. This will happen more towards the mid of the year.

I will come back with some other questions.

(OPERATOR INSTRUCTIONS). Paula Kovarsky of Itau Corretora.

The first question relates to Petrobras debt equity ratio. For a Company with investment-grade ratings, wouldn't that be a way too timid position? And the Company would be giving up on the possibility to improving WACC by having a higher debt rate.

The other question relates to production. Petrobras presented higher production growth over the last four years against its international trade peers. And this is indeed a major achievement. But this notwithstanding, the impression is that -- the impression that the Company leaves with the market is that they are never, never achieving their target. So last year we had 100,000 barrels below the target.

My question is wouldn't that suggest that the targets should be set in a different way? What is going on is that the Company is being punished by not achieving targets and not being recognized by the achievements in themselves.

This is a good question, but we [just] establish our goals as a challenge. Always in the top or the maximum where we could reach. But we keep growing. And we are breaking many records by doing that.

I don't know if we have changed and giving to the market a more conservative figure would be better. Really this is a point to be analyzed. And sorry, I forgot the first question; it was about --?

Debt equity ratio.

Yes.

Isn't it too timid for a Company with investment-grade ratings? Aren't you giving up on improving the Company's WACC by having higher debt in your balance sheet?

Yes, this is good point, and we are working on that. The share buyback will help us to reduce the leverage -- to increase the leverage. We're looking for other opportunities.

But the cash flow generation was really very strong. And even increasing our CapEx we will still have leverage that is not our ideal. We would like to have it more to near 30% of leverage. This would give us a better WACC.

And maybe with investment-grade now we could work with some facilities that could be provided by the banks, as other oil companies have outside Brazil. But we still do not have this kind of facility available, with no cost up to the moment of use. This will help us to reduce the cash balance.

Marcus Thieme, RBC.

I know the last year you just bought some of your debt back, and also you completed a [debt] exchange transaction recently as well. But are you done with your debt buyback?

And my second question is, are you planning to issue any dollar-denominated bonds this year?

Regarding the debt buyback, we are not done. We would like to buy all the old debt. But as you -- if you have any, bring, offer [and I] can buy what you have on the market price. And even if you want to make an exchange, we can do, or any other investor on these bonds.

But the liquidity of these assets is lower and lower as we take part from the market. Maybe [up to] the end of the year we will be able to do something else. But we don't have at this moment anything programmed and approved. And the second question was --?

If you're planning to issue?

No. Regarding the issue, we may issue in Brazil. And we are doing near -- maybe in one month's time we will be bringing to the market the CRI, a kind of Brazilian bond that is related to buildings, building construction. And we have many of them happening in Brazil. So we intend to use this facility, or this financial facility, to finance. It is very convenient for the Company. And it is a new way to tap the market.

Internationally we don't have plans at the moment. It all depends on the oil price. If oil price will keep as it is today, probably we will not be tapping the market until the end of the year.

Gustavo Gattass, UBS.

I have two follow-up questions here. One on P-37. Molinari mentioned the maintenance in January. I just want to know if that maintenance is going to take one month, more than a month, if it hits the February numbers as well?

Molinari, can you help us?

Yes, the maintenance of P-37 ended the 3rd of February. It started the 19th of January. And then we had a partial stoppage for some days. And then we had a full stoppage until 31st of January, and a partial stoppage until the 3rd of February. The result was we lost 46,000 barrels per day.

During how many days? In January.

From 19th of January until the 3rd of February.

So about 12 days, 14 days.

The second question that I had, on your message to shareholders you guys mentioned a number of changes on the E&P program from now until 2011. The two most notable ones being the cancellation of the bidding process for those big FPSOs that were going to come online in the end of the period. There is no change as of now on the production guidance that you're giving. I just wanted to have a feel. Have you not mentioned this point, because it will be touched on in the future, or are you guys still sticking to the number for 2011?

Okay, Molinari; so, please?

We are keeping the target till 2011. The production target for 2007 is 1,919,000, as Almir said in the morning. From 2008 to 2011 we're keeping the target from the strategic plan.

I will turn the floor back over to Mr. Almir Barbassa for any closing remarks you may have.

Thank you, ladies and gentlemen, for being here with us. And I hope that next quarter we can have as good results as we had at this time. So hoping to meet you next time. Thank you very much.

Thank you. This does conclude today's Petrobras conference call. You may now disconnect.