Consolidated net income attributable to the shareholders of Petrobras and EBITDA reached R$7,868 million and
R$27,120 million, respectively, in the first half of 2012.

The Company registered consolidated net loss of R$1,346 million in the second quarter of 2012.

Highlights

The net loss reported in the second quarter of 2012 was mainly a result of exchange depreciation, but was also affected by other operating and economic conditions:

·         The depreciation of the Real against the U.S. Dollar significantly affected the net financial expenses due to our dollar-indexed debt as well as the dollar-related costs of the Company.

·         Higher expenses with write-offs of dry or sub-commercial wells, mainly drilled between 2009 and 2012, primarily located in areas of new frontiers.

·         Crude oil production decreased due to maintenance stoppages aiming to increase operational efficiency.

·         Higher lifting costs due to stoppages and expenses with the operational efficiency improvement program of mature fields, which benefits did not occur in this period.

·         The price of oil products sold in Brazil remained significantly lower than international prices, during greater part of this quarter, being partially adjusted on June, 25, 2012.  

·         The oil products demand increased and was primarily met by realization of inventories purchased previously at higher costs and a higher percentage of oil products imports in the sales mix, mainly diesel.

·         The decrease in international prices at the end of the period generated inventory losses in the refineries outside of Brazil.

·         LNG imports increased in order to meet higher thermoelectric demand while electricity sales margins decreased due to the higher differences settlement price. The thermoelectric demand diminished at the end of the period. 

Dear Shareholders and Investors,

Petrobras posted a loss in the second quarter of 2012, chiefly due to a combination of the following factors: the substantial depreciation of the Real against the U.S. dollar, the extraordinary expenses from dry wells mainly drilled between 2009 and 2012, the lower oil export as a result of reduced oil output due to scheduled stoppages to improve operational efficiency and safety, and the mismatch between domestic and international oil product prices.

We are doing everything possible to resume profitability. Since I was appointed CEO of Petrobras five months ago, I have been reiterating our commitment to international price parity. As part of our oil product adjustment policy in Brazil, we recently announced two price increases: 3.94% for diesel and 7.83% for gasoline as of June 25, and another 6% for diesel as of July 16. These increases are necessary to ensure the financial feasibility of our Business and Management Plan, enabling us to preserve our leverage limits and guarantee our profitability.

The new Plan focuses on oil and gas production in Brazil and is underpinned by realism, precise targets  and rigorous project management with capital discipline. Since its publication, we have made advances with several important issues. Recent examples include the signature of contracts for the construction of drilling rigs and pre-salt replicant platform topsides. The Brazilian shipyards have also made progress, exemplified by the successful deck mating of the P-55 platform in the Navy Complex of Rio Grande and the definition of Estaleiro Atlântico Sul’s new technological partner. We will also continue with our efforts to recover the operational efficiency of the Campos Basin and optimize operating costs, two essential vectors for ensuring better results.

Two new systems are scheduled to begin operations in the second half of 2012: Cidade de Anchieta, with a capacity of 100,000 bbl/d (Baleia Azul) and Cidade de Itajaí, with a capacity of 80,000 mil bbl/d (Baúna & Piracaba), both of which, together with the start-up of new wells in other systems, will help us to increase production and reach our 2012 targets.

On the refining front, we have achieved excellent levels of operational efficiency, accompanied by new processing records. We continued to upgrade our infrastructure and the Refinaria Presidente Getúlio Vargas (Repar) coking unit will begin operating at full capacity in August, increasing the diesel production.

Finally, I would like to reaffirm my firm confidence in Petrobras’ privileged position in the oil and gas sector. Our reserves, expertise, highly qualified personnel, investments and track record of overcoming challenges will lift our Company to levels of excellence that will generate consistent returns for our shareholders.

Main Items and Consolidated Economic Indicators

The information of the second quarter of 2011 were adjusted by the adoption of the accounting practice under CPC 19 (R1), which allows the use of the equity method for evaluating and reporting investments in jointly controlled entities, from the fourth quarter of 2011 on. Despite the CPC 19 (R1) adoption have generated changes in assets, liabilities, revenues and expenses accounts and also in financial indicators, there was no effect on net income and on shareholders’ equity attributable to the shareholders of Petrobras.

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     1    Basic and diluted earnings per share calculated based on the weighed average number of shares.

     2    Calculated based on net income before financial results and income taxes.

     3    Income before financial income (expenses), net, equity in earnings of investments and depreciation, depletion and amortization.

     4    Average exports and of the internal transfer prices from Exploration & Production to Refining, Transportation and Marketing.

     5    As of September 2011, we have factored in natural gas realization prices.

RESULTS OF OPERATIONS

2Q-2012 x 1Q-2012 Results:

Gross Profit

Gross profit reached R$16,015 million in the second quarter of 2012, a 21% decrease compared to the R$20,244 million in the first quarter of 2012, mainly due to:

 Sales revenues, which increased by 3% to R$68,047 million in the second quarter of 2012 compared to R$66,134 million in the first quarter of 2012, reflecting:

·    The 4% increase of domestic demand, mainly diesel and natural gas, partially offset by lower oil exports due to the higher feedstock processed by the refineries and to the lower oil production.

·    The impact of the depreciation of the Real against the U.S. dollar on export prices and on domestic oil products sales indexed to international prices, partially offset by lower international Brent crude oil (9%) and oil product prices.

 Cost of sales, which increased 13% to R$52,032 million in the second quarter of 2012 compared to R$45,890 million in the first quarter of 2012, due to the increase of the domestic sales volume (4%), which was met mainly by imports, primarily diesel and LNG, by the realization of inventories purchased previously at higher costs and by the exchange variation effects on imports and on production taxes.

Net income before financial results and income taxes

Net income before financial results and income taxes decreased by 55% to R$5,282 million in the second quarter of 2012 compared to R$11,771 million in the first quarter of 2012, due to the lower gross profit and to the increase of exploration costs (R$2,405 million), mainly as a result of the higher write-offs of dry or sub-commercial wells, mainly drilled between 2009 and 2012  at higher costs primarily located in areas of new exploratory frontiers, besides the estimated losses for marking-to-market the inventories of refineries outside of Brazil(R$509 million), due to lower international prices.

Financial Income (Expenses), Net

Net financial expense of R$6,407 million in the second quarter of 2012, due to the impact of a 10.9% depreciation of the Real against the U.S. dollar on our debt, compared to a net financial income of R$465 million in the first quarter of 2012.

Consolidated net income/(loss) attributable to the shareholders of Petrobras

Consolidated net loss attributable to the shareholders of Petrobras reached R$1,346 million in the second quarter of 2012, reflecting higher financial expenses and lower net income before financial results and income taxes.

RESULTS OF OPERATIONS

1H-2012 x 1H-2011 Results:

Gross Profit

Gross profit reached R$36,259 million in the first half of 2012, a 9% decrease compared to R$39,864 million in the first half of 2011, mainly due to:

  Sales revenues, which increased by 16% to R$134,181 million in the first half of 2012 compared to R$115,365 million in the first half of 2011, reflecting:

·    Higher export prices and of domestic oil products indexed to international prices (Brent 2%), as well as exchange variation effects (14%);

·    The 8% increase of domestic demand, mainly gasoline (20%), reflecting its higher competitive advantage compared to ethanol, and of diesel (7%) and jet fuel (9%);

·    Increase in the domestic prices of gasoline and diesel of 10% and 2%, respectively, in November 2011.

  Cost of sales, which increased by 30% to R$97,922 million in the first half of 2012 compared to R$75,501 million in the first half of 2011, due to:

·    Increase of 8% in the domestic oil products sales volume, which were met mainly by imports;

·    The impact of higher international prices and exchange variation effects on crude oil imports, oil products imports and production taxes;

·    Higher depreciation, depletion and amortization costs due to the operational start-up of new plants.

Net income before financial results and income taxes

Net income before financial results and income taxes decreased by 30% to R$17,053 million in the first half of 2012 compared to R$24,200 million in the first half of 2011, due to the lower gross profit and to the 23% increase in operating expenses, mainly as a result of:

·   Higher selling expenses (R$466 million), due to increased freight costs generated by higher sales volume and also by higher personnel expenses arising out of the Collective Bargaining Agreement for 2011;

·   Increased administrative and general expenses (R$639 million), generated by higher personnel expenses arose from the Collective Bargaining Agreement for 2011, by increased workforce and by increased expenses with third-party technical services;

·   Higher exploration costs (R$2,286 million), due to higher write-offs of dry or sub-commercial wells, mainly drilled between 2009 and 2012 at higher costs, primarily located in areas of new exploratory frontiers.

Financial Income (Expenses), Net

Net financial expense of R$5,942 million in the first half of 2012, due to the impact of a 7.8% depreciation of the Real against the U.S. dollar on our debt, compared to a net financial income of R$4,949 million in the first half of 2011 due to the impact of a 6.3% appreciation of the Real against the U.S. dollar.

Consolidated net income/(loss) attributable to the shareholders of Petrobras

Consolidated net income attributable to the shareholders of Petrobras reached R$7,868 million in the first half of 2012, a 64% decrease compared to R$21,928 million in the first half of 2011, reflecting higher financial expenses and lower net income before financial results and income taxes.

NET INCOME BY BUSINESS SEGMENT

Petrobras is an integrated energy company, with the greater part of its oil and gas production in the Exploration & Production segment being transferred to other business segments of the Company.

In the computation of the results by business segment, transactions carried out with third parties and the transfers between the business departments are considered and they are valued by internal transfer prices defined between the departments using calculation methodologies based on market parameters.

EXPLORATION & PRODUCTION

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(*)  Not revised.

6    Does not include LNG. Includes reinjected gas.

GAS & POWER

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(*)    Not revised.                                                                

10    Weekly weighed prices per output level (light, medium and heavy), number of hours and submarket capacity.

BIOFUEL

DISTRIBUTION

^(*)

INTERNATIONAL 

Our domestic sales volumes increased 8% in the first half of 2012 compared to the first half of 2011, primarily due to:

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents

On June 30, 2012, we had cash and cash equivalents of R$26,318 million compared to R$35,747 million at December 31, 2011. 

Net cash provided by operating activities decreased from R$26,755 million in the first half of 2011 to R$26,100 million in the first half of 2012, primarily due to the effects of higher international prices and the exchange variation effects on production taxes and on crude oil and oil products imports that also had the volumes increased in the period.

Net cash used in investing activities increased from R$28,184 million in the first half of 2011 to R$37,494 million in the first half of 2012, primarily due to the capital expenditures and investments in business segments, the greater part of which invested in Exploration & Production (R$19,741 million) and Refining, Transportation and Marketing (R$11,874 million) activities.

Net cash provided in financing activities decreased from R$6,610 million in the first half of 2011 to R$992 million in the first half of 2012 due to the higher repayment of debts in the first half of 2012.

Our adjusted cash and cash equivalents¹⁴ reached R$45,947 million on June 30, 2012, which includes government securities with maturity of more than 90 days of R$19,629 million, 17% higher compared to R$16,785 million on December 31, 2011.

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14    Our adjusted cash and cash equivalents are not computed in accordance with International Standards -IFRS and should not be considered in isolation or as a substitute for cash and cash equivalents calculated in accordance with IFRS.  Our calculation of adjusted cash and cash equivalents may not be comparable to adjusted cash and cash equivalents of other companies. Management believes that adjusted cash and cash equivalents is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements.

Capital expenditures and investments