FOURTH QUARTER OF 2012

Consolidated net income attributable to the shareholders of Petrobras reached US$ 3,763 million in the fourth quarter of 2012 and US$ 11,034 million in 2012. Adjusted EBITDA reached US$ 5,803 million in the 4Q-2012 and US$27,632 million   in 2012.

Highlights

The Company reported fourth quarter 2012 earnings of US$ 3,763  million and the following highlights:

·         Proved reserves reached 12.88 billion barrels of oil equivalent (BOE) according to SEC criteria. The Reserves-to-Production ratio (R/P) was 14.6 years and the reserve replacement ratio was higher than 100% for the twenty-first consecutive year (101%).

·         Crude oil production increased, mainly reflecting the production startup of the Baleia Azul pre-salt field, in the Campos Basin, in September 2012 and the improved operational efficiency of this basin. 

·         Higher gasoline and natural gas domestic sales volumes, mainly met by a higher share of imports.

·         Gains on disposal of National Treasury Notes – B Series (NTN-B) helped to increase the finance income.

·         The amount of US$ 4,499 million relating to dividends proposed comprise interest on capital in the amount of US$ 0.24 per common share and US$ 0.48 per preferred share, of which US$1,432 million were paid in advance during 2012. Interest on capital is a form of dividend distribution which is deductible for tax purposes in Brazil. An amount of US$1,043 million was recognized in the fourth quarter relating to tax benefits from interest on capital.

·         The cost reduction targets for the Operating Costs Optimization Program (PROCOP) were announced in December 2012, with potential savings of U.S.$15.7 billion in the 2013-2016 period.

Comments from the CEO -

Mrs. Maria das Graças Silva Foster 

Net income for 2012 was U.S.$ 11 billion. This result, 45% below 2011 net income, was the result of growing oil product imports at higher prices, the depreciation of the Real, which impacts both our financial result and operating costs, and the increase in non-recurring expenses such as the write-off of dry wells. Contributing to the lower income was the daily production of oil in Brazil, which although within our target range according to PNG 2012-2016, was 1,980 kbpd, 2% lower than 2011.

Our Brazilian refineries produced 1,997 kbpd of refined products, an increase of 5% over 2011. Improved operating efficiency (96% utilization factor) was responsible for the higher output, leading to record processing and reduced import needs. Natural gas consumption increased to 74.9 million m3/d, up 22% from the prior year, due to increased demand from thermoelectric power plants. Demand reached 89.4 million m3/d in the fourth quarter, as a result of record daily energy generation (5,883 MW on November 26), with domestic gas deliveries (49.6 million m3/d on October 11), reducing the need to import LNG and Bolivian gas.

Despite the adversities faced by Petrobras in 2012, I would like to reiterate my strong belief in the Company’s medium and long-term prospects. This Administration fully recognizes the difficulties we face and is working ceaselessly to overcome them. Following an extensive and detailed diagnosis of our operating problems, we defined priorities and implemented short and medium-term structuring initiatives to improve our financial and economic results. The Operating Cost Optimization Program (Procop), the Program to Increase the Operating Efficiency of the Campos Basin (Proef), the Divestment Program (Prodesin) and the Logistics Infrastructure Optimization Program (Infralog) are examples of these initiatives, which have built-in goals and indicators established by various working teams and approved by the Executive Board, and are currently being intensely monitored by top Management.

The positive results are already measurable. The Proef has already begun to reverse the sharp drop in the efficiency of the Campos Basin Operational Unit, which fell to as low as 67% in April of 2012 when the program was implemented, but improved to 78% in December; the Procop established 515 cost reduction initiatives that will generate savings of U.S.$15.7 billion between 2013 and 2016; and Infralog will rationalize the port, airport, pipeline and terminal project portfolios in order to meet expected oil and oil product output and market demand by 2020.

These new processes are now part of our daily routine and dialogue. I would like to highlight the Executive Board meetings, which are now held twice weekly to focus on the physical and financial monitoring of the principal projects in our investment plan. We have also implemented a number of important structural and organizational changes throughout the Company during 2012, enhancing efficiency, while at the same time promoting needed administrative changes. We are fully aware that only the constant pursuit of efficiency will allow us to achieve permanent gains that will improve the Company’s long term profitability, which is this Administration’s primary objective.

In 2013, we can only expect to maintain the current level of oil production. This is because of the concentration of scheduled maintenance stoppages of platforms that is needed in the first half of the year. Eventually offsetting the impact of the maintenance will be six new platforms to begin operations in the Sapinhoá, Baúna and Piracaba, Lula Nordeste, Papa-Terra and Roncador fields. These will contribute to growing production in the second half of the year, with the surge of output expected to continue into 2014. We will maintain the pace of our investments, which are estimated at U.S.$47.8 billion in 2013, mostly allocated to oil and gas exploration and production in Brazil.

I am determined, together with the Executive Board and its leadership, to consolidate a process of improving management. Guided by transparency and pragmatism, we will continue to devote all our knowledge and efforts to achieving the goals of our Business and Management Plan, thereby generating more value for our shareholders and investors.

Maria das Graças Silva Foster

CEO

Main Items and Consolidated Economic Indicators  

RESULTS OF OPERATIONS

2012 compared with 2011:

Virtually all revenues and expenses of our Brazilian operations are denominated and payable in Brazilian Reais. When the U.S. dollar strengthens relative to the Brazilian Real, as it did in 2012 (a 14.3% impact), revenues and expenses decrease when translated into U.S. dollars. Notwithstanding, the appreciation of the U.S. dollar against the Brazilian Real affects the line items discussed below in different ways.

Gross Profit

Gross profit was 21% lower (US$ 9,751 million) compared with 2011, mainly due to:

Ø A 1% decrease in sales revenues (US$ 1,812 million), due to the appreciation of the U.S. dollar.

Excluding foreign currency translation effects, local currency sales revenues were 15% higher, driven by:

·   Rising export prices and higher oil product prices in the domestic market due to increased gasoline and diesel prices and to the impact of the depreciation of the Real (14.3% impact) on oil products that are adjusted to reflect international prices;

·   An 8% increase in domestic sales volumes, mainly of gasoline (17% increase), diesel (6%), jet fuel (5%) and natural gas (17%), partially offset by lower crude oil exports volumes due to higher feedstock processed and to the lower crude oil production.

Ø Cost of sales was 8%  higher (US$ 7,939 million), due to:

·    An 8% increase in domestic sales volumes of oil products, mainly met by imports; 

·    Higher crude oil and oil products imports costs, as well as higher production taxes driven by the depreciation of the Real relative to the U.S. dollar;

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

·    Partially offset by the foreign currency translation effects, as the local currency cost of sales was 26% higher.  

Net income before financial results, profit sharing and income taxes

Net income before financial results, profit sharing and income taxes decreased by 38% (US$ 10,385 million) due to the lower gross profit and to the increase of operating expenses.

Operating expenses were 3% higher (US$ 634 million), mainly due to:

·    Increased selling expenses: higher freight costs driven by the increase of sales volumes and higher employee compensation expenses arising from the 2011 and 2012 Collective Bargaining Agreements;

·    Higher general and administrative expenses: higher employee compensation expenses arising from the 2011 and 2012 Collective Bargaining Agreements, larger workforce and increased third-party technical services;

·    Increased exploration costs, reflecting higher write-offs of dry or sub-commercial wells;

·    Higher other operating expenses, mainly due to increased losses on legal and administrative proceedings.

·    Partially offset by the foreign currency translation effects, as the local currency operating expenses were 21% higher.

A breakdown of other operating expenses by segment is included on page 22.

Net finance income (expense)

Net finance expense was US$ 1,926 million in 2012 (compared with a net finance income of US$ 76 million in 2011), driven by the effect of the appreciation of the U.S. dollar relative to the Real on a higher net debt.

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

Consolidated net income attributable to the shareholders of Petrobras reached US$ 11,034 million in 2012, a 45% decrease compared with US$ 20,121 million in 2011, mainly reflecting the effect of the appreciation of the U.S. dollar relative to the Real on a higher net debt and lower net income before financial results, profit sharing 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.

The measurement of segment results includes transactions carried out with third parties and transactions between business areas which are charged at internal transfer prices defined between the areas using methods based on market parameters.

Information about our operating segments and other related information are set out below.

EXPLORATION & PRODUCTION

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income was lower due to the appreciation of the U.S. dollar relative to the Real. Excluding foreign currency translation effects, local currency net income was higher, due to increased domestic crude oil prices (sales/transfer), reflecting the depreciation of the Real and to lower impairment charges. These effects were partially offset by higher maintenance and repair costs related to wells, freight costs for oil platforms, depreciation of equipments and production taxes due to the start-up of new systems/wells, along with higher write-offs of dry or sub-commercial wells mainly drilled between 2009 and 2012 (at higher costs), especially in areas of new exploratory frontiers.

The spread between the average domestic oil price (sale/transfer) and the average Brent price diminished from US$9.03/bbl in 2011 to US$6.98/bbl in 2012.

Crude oil and NGL production decreased due to higher operational losses and to a stoppage in the Frade field, partially offset by the startup of new wells and by an increase in the operational efficiency levels in the Campos Basin.

Natural gas production increased due to the Uruguá, Mexilhão, Lula and Tambaú fields and to the higher efficiency in platforms in the Campos Basin.

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(*) Not revised.

⁷ Does not include LNG. Includes reinjected gas.

Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes increased by 11% in 2012 compared with 2011. Excluding the impact of the appreciation of the U.S. dollar it increased by 22% due to higher maintenance and repair costs related to wells in the Marlim and Albacora fields, in connection with the Operational Efficiency Increase Program (Programa de Aumento da Eficiência Operacional – PROEF), as well as higher employee compensation costs arising from the 2011 and 2012 Collective Bargaining Agreements and higher workforce. 

Lifting Cost - Including production taxes

Lifting cost including production taxes increased by 4% in 2012 compared with 2011. Excluding the impact of the appreciation of the U.S. dollar it increased by 9% due to the effects described above for the lifting cost excluding production taxes and also due to the higher special participation charges on Jubarte, Marlim Sul and Lula fields. These effects were partially offset by a 2% decrease on the average reference price of domestic oil in U.S. dollars, used to compute the production taxes.

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(*) Not revised.

REFINING, TRANSPORTATION AND MARKETING

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net losses were higher due to the impact of the appreciation of the U.S. dollar on crude oil costs (acquisition/transfer) and oil product costs (imports), and also due to a higher share of oil product imports over sales volumes. These effects were partially offset by higher oil product sales prices (both domestic and exports) and by a 5% increase in oil product outputs.

Higher oil product import volumes, mainly gasoline and diesel, to meet the higher domestic demand.

Lower crude oil export volumes due to lower production and increased feedstock processed.

Oil product export volumes decreased due to the higher domestic demand.

________________

(*) Not revised.

  ⁸ Include crude oil export volumes of Refining, Transportation and Marketing and Exploration & Production segments.

  ⁹  Starting from the second quarter of 2012, this number only includes volumes delivered to third parties. We have adjusted the 2011 numbers for comparison purposes.

Daily feedstock processed increased by 4% due to the lower scheduled maintenance stoppages and to the improved operating performance of the units.

Refining cost decreased by 17% compared with 2011.  Excluding the impact of the appreciation of the U.S. dollar, it decreased by 3%, due to lower scheduled stoppages expenses and higher feedstock processed, partially offset by higher employee compensation costs arising from the 2011 and 2012 Collective Bargaining Agreements. 

________________

(*)Not revised.

¹⁰ As registered by the National Petroleum, Natural Gas and Biofuel Agency (ANP).

GAS & POWER

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income decreased due to lower margins on natural gas sales, driven by the impact of the appreciation of the U.S. dollar on LNG import costs and higher share of LNG imports over sales volumes, to meet the higher domestic thermoelectric demand, and also due to the positive impact of tax credits in 2011 (U.S.$554 million). These effects were partially offset by higher average electricity prices and sales volumes, due to the lower hydroelectric availability, driven by lower rainfall levels in all Brazilian regions.

Electricity sales volumes increased due to the higher proved capacity available.

The electricity generation and the differences settlement price were higher, driven by the lower rainfall levels in the period.

LNG import volumes increased to meet the domestic thermoelectric demand.

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(*)Not revised.

¹¹ Differences settlement price is the price of electricity in the spot market and is computed based on weekly weighed prices per output level (light, medium and heavy), number of hour and submarket capacity.

BIOFUEL 

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Losses on biodiesel operations in 2012 were partially offset by changes in auction rules in the fourth quarter 2011. This effect was more than offset by a decrease in the share of profit of investments due to lower results from associates from the ethanol sector and by an increase in research and development expenses.

DISTRIBUTION 

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income was higher due to an increase in sales margins compared with 2011 driven by the impact of ethanol prices volatility in 2011, leading to inventory losses, and to a 4% increase in sales volumes, as well as improved operational efficiency.

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(*)Not revised.

¹² Our market share in the Distribution Segment in Brazil based on estimates made by Petrobras Distribuidora.

INTERNATIONAL 

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income was lower mainly due to impairment losses in the Pasadena refinery in the United States (US$ 225 million).

Crude oil and NGL production was virtually flat in the period. The agreements related to Upia, Caguan and Hobo in Colombia were terminated and there was a scheduled stoppage in the Akpo field (in November 2012) along with a production decrease related to the production-sharing agreement, both in Nigeria. These effects were offset by the production startup of the Cascade and Chinook fields and by Coulomb field in the United States, which resumed to normal operation.

Natural gas production remained flat in the period.

________________________

(*)Not revised.

¹³ International production of crude oil and natural gas comprise the production in some countries, such as Nigeria and Angola, where we operate under a production-sharing model, for which the production taxes are charged in crude oil barrels.

Lifting cost was higher due to initial production costs related to third-party services and well intervention in the Cascade field in February 2012 and in the Chinook field in September 2012, both in the United States, as well as higher maintenance and repair costs in mature fields in Argentina.

Feedstock processed, output of oil products and utilization of nominal capacity were higher, due to higher operational efficiency in the Pasadena Refinery in the United States and due to higher feedstock processed in our Japanese refinery to meet the higher domestic demand. These effects were partially offset by the disposal of the San Lorenzo Refinery in Argentina in May 2011.  

Refining cost was lower due to higher operational efficiency in the Pasadena Refinery in the United States.

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(*)Not revised.

Sales Volumes – (mbbl/d) ^(*)

Our domestic sales volumes increased by 8% in 2012 compared with 2011, primarily due to:

·         Gasoline (a 17% increase) – due to the increase in the flex-fuel automotive fleet, higher competitive advantage relative to ethanol in most Brazilian federal states and the reduction of the anhydrous ethanol content on Type C gasoline as from October 2011 (from 25% to 20%);

·         Diesel (a 6% increase) – due to the increase in the retail sector, along with higher thermoelectric consumption in the northern region of Brazil;

·         Natural gas (a 17% increase) – due to higher thermoelectric demand, driven by lower water reservoir levels at hydroelectric power plants.

·         Jet fuel (a 5% increase) – due to higher demand in the aviation sector.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows Data – Summary ¹⁴

At December 31, 2012, we had cash and cash equivalents of US$ 13,520 million compared with US$19,057 million at December 31, 2011. 

Net cash provided by operating activities decreased by 17% in 2012 (US$27,888 million) compared with 2011 (US$33,698    million), driven by lower gross margins due to the impact of the appreciation of the U.S. dollar on imports of crude oil and oil products and production taxes, as well as higher import volumes in 2012.

Net cash used in investing activities increased from US$34,619 million in 2011 to US$38,379 million in 2012, mainly invested in Exploration & Production (US$ 21,395 million) and Refining, Transportation and Marketing (US$ 13,718 million) activities.

Cash provided by long-term financing (US$25,205 million) along with cash provided by operating activities (US$27,888 million) sourced part of our capital expenditures needs, repayment of debts and payment of dividends, hence US$5,537 million from our cash and cash equivalents were used in 2012.

Our adjusted cash and cash equivalents¹⁵ reached US$ 23,732 million at December 31, 2012 (which includes government securities with maturity of more than 90 days of US$ 10,212 million), 15% lower compared to US$28,005 million at December 31, 2011.

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¹⁴ For more details, see the Consolidated Statement of Cash Flows Data on page 19.

¹⁵ Our adjusted cash and cash equivalents are not computed in accordance with 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

Pursuant to its strategic objectives, the Company operates through joint ventures in Brazil and abroad, as a concessionaire of oil and gas exploration, development and production rights.

In 2012 we invested an amount of US$42,949 million, primarily aiming at increasing production, modernizing and expanding our refineries, as well as integrating and expanding our transportation network through pipelines and distribution systems.

Consolidated debt

At December 31, 2012 the net debt in U.S. dollars was 32% higher than at December 31, 2011, due to long-term debt financing and to an impact of 8.2% from the appreciation of the U.S. dollar relative to the Real.

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¹⁶ Includes finance lease obligations (Current debt: US$ 18 million on December 31, 2012 and US$ 44 million on December 31, 2011; Non-current debt: US$ 86 million on December 31, 2012 and US$ 98 million on December 31, 2011). 

¹⁷ Our net debt is not computed in accordance with IFRS and should not be considered in isolation or as a substitute for total long-term debt calculated in accordance with IFRS.  Our calculation of net debt may not be comparable to the calculation of net debt by other companies. Management believes that net debt is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements.

¹⁸ Total liabilities net of adjusted cash and cash equivalents.

FINANCIAL STATEMENTS

Income Statement – Consolidated

Statement of Financial Position – Consolidated¹⁹

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¹⁹ Some amounts of 2011 were reclassified to provide better comparison with the current period, without generating effects on Income Statement and Shareholders’ Equity.

Statement of Cash Flows Data – Consolidated  

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²⁰ Includes income of marketable securities, mainly derived from the sale of NTN’s-B in 2012, and from judicial deposits.

Consolidated Income Statement by Segment