FIRST QUARTER OF 2013

Consolidated net income attributable to the shareholders of Petrobras reached US$3,854 million in the 1Q-2013.  Adjusted EBITDA reached US$8,133 million in the 1Q-2013, 40% higher compared to the 4Q-2012.

Highlights 

The Company reported 1Q-2013 earnings of US$3,854 million and the following highlights:

·         A 5.4% increase of diesel prices and a 6.6% increase of gasoline prices in January 30, as well as a 5% increase of diesel prices in March 6, helped reduce the gap between domestic prices for oil products and international prices.

·         Higher performance indicators in refining operations, reaching 2,083 Mbbl/d of feedstock processed (6% increase compared to the 4Q-2012), reducing oil products imports.

·         A 40% increase in the adjusted EBITDA, compared to the 4Q-2012, driven by lower operating expenses, along with the highlights above.

·         Oil production decreased as previously scheduled, due to a higher number of stoppages and to the natural production decline of the fields, partially offset by the higher production of the new production systems.

·         On February 20, 2013 the Company reached the level of 300 Mbbl/d of oil production at the pre-salt layer.

Dear Shareholders and Investors,

In the first quarter of 2013, we achieved a net income before financial results, share of profit of equity-accounted investments and income taxes of US$ 4.9 billion, which represents an increase of 77% as compared to the prior quarter. Of the principal factor behind this improvement, I would like to highlight the increases in diesel and gasoline prices which took place in January and March 2013, higher production of oil products at our refineries, and lower operating expenses. Net income attributable to the shareholders of Petrobras was US$ 3.9 billion, in line with the net income of 4Q12, which benefited from US$ 1.0 billion in lower income tax due to the provisioning of interest on capital.

As we previously announced, oil production fell in the 1Q13 (4% as compared to 4Q12). In our 2013-2017 Business & Management Plan (2013-17 BMP), we stated that average production of oil and natural gas throughout 2013 would be similar to that of 2012, with lower levels in the first half of the year due to a higher rate of maintenance stoppages. In 1Q13 our average refinery output set new daily records of processing.  Throughput was 2,127 thousand bpd, increasing 6% over the previous quarter as a result of higher operational efficiency in refineries, with an average utilization factor of 98%. We also maintained excellent operating performance in our gas and power business during the quarter, supplying an average of 88 million m³/d per day of natural gas, and generating an average of 5,120 MW of power at our thermoelectric plants.

I would also like to stress our confidence in the outlook for growth of Petrobras’ oil and gas production. We started operating two units this quarter, FPSO Cidade de São Paulo and Cidade de Itajaí. FPSO Cidade de Paraty has been on location at Lula NE field since April 18th, where it is being anchored, and is due to start-up on May 28th. An additional four units will go on stream throughout the year (P-63, P-55, P-58 and P-61); contributing to the sustainable production increase as from the second half of 2013.

I’ve been saying that improving our cash flow would not come only from price increases, but also from our operational efficiency and cost optimization. Price increases are indeed important and we remain committed to an alignment with international prices, as shown in the latest price increases. However, it is just as important to improve our efficiency in operational activities and in capital expenditures with projects, objectives evident in programs such as Proef (operational efficiency increase), PRC-Poço (well capital expenditure reduction), Infralog (logistical optimization), Prodesin (divestment portfolio) and Procop (operating costs optimization). I would like to highlight the contribution of the latter: from January to March 2013, we targeted a reduction in operating costs of US$ 324 million. During the first quarter, we were able to save US$ 0.7 billion, which is one third of the 2013 target (US$ 1.9 billion).

We are doing our homework, and results are being delivered as planned. I constantly monitor the progress of our investment projects and structuring programs with the Directors, Executive Managers, and all other leaders involved. I regard the increased integration between the Company’s areas and their teams as extremely positive; the proper management of our project portfolio provides us with the confidence that we will be able to achieve the goals of 2013-17 BMP, which will guarantee the returns expected by our shareholders and investors.

Maria das Graças Silva Foster

Chief Executive Officer

Main Items and Consolidated Economic Indicators  

RESULTS OF OPERATIONS

1Q-2013 compared with 1Q-2012:

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 the 1Q-2013 (a 13% 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 17% lower (US$  2,003 million) compared with the 1Q-2012, mainly due to:

Ø Sales revenues of US$  36,345 million, 3% lower when compared to the 1Q-2012, due to the appreciation of the U.S. dollar.

Excluding foreign currency translation effects, local currency sales revenues were 10% higher, driven by:

·   Higher oil product prices in the domestic market due to increased gasoline and diesel prices, to higher electricity prices and to the impact of the depreciation of the Real (13% impact) on oil products that are adjusted to reflect international prices;

·    A 9% increase in domestic demand, mainly of gasoline (6%), diesel (7%), natural gas (29%) and fuel oil (57%), offset by lower crude oil export volumes due to higher feedstock processed and to lower crude oil production.

Ø Cost of sales of US$ 26,897 million, 4% higher compared to the 1Q-2012, due to:

·    A 9% increase in domestic sales volumes, mainly met by higher diesel and natural gas imports;

·    The impact of the depreciation of the Real (13% impact) on crude oil, oil products and natural gas import costs;

·    Increased oil production expenses, due to higher number of well maintenances and to the production start-up of new plants;

·    Partially offset by the foreign currency translation effects, as the local currency cost of sales was 17% higher.  

Net income before financial results, share of profit of equity-accounted investments and income taxes

Net income before financial results, share of profit of equity-accounted investments and income taxes reached US$  4,935 million, a 26% decrease compared to the 1Q-2012 due to the lower gross profit. Excluding foreign currency translation effects, it decreased by 16% and operating expenses increased by 6%, mainly due to higher exploration costs, reflecting higher geological and geophysical expenses.

Net finance income (expense)

Net finance income of US$ 696 million, US$ 433 million higher compared to the 1Q-2012, driven by positive exchange variation effects on a higher net debt.

Consolidated net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached US$3,854 million in the 1Q-2013, a  26% decrease (US$ 1,358 million) compared to the 1Q-2012, mainly reflecting the lower net income before financial results, share of profit of equity-accounted investments and income taxes and the higher income tax expenses on net income that in the 1Q-2012 were reduced by the tax benefit of US$ 487 million from the deduction of interest on capital. These effects were partially offset by the higher net finance income.

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 priced 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 decreased crude oil and NGL production, higher depreciation/depletion costs, higher personnel expenses, increased freight costs for oil platforms, higher well interventions and maintenances costs, as well as higher geological and geophysical expenses. These effects were partially offset by higher crude oil prices (sales/transfer), reflecting the appreciation of the U.S. dollar.

The spread between the average domestic oil price (sale/transfer) and the average Brent price increased from US$6.93/bbl in the 1Q-2012 to US$9.64/bbl in 1Q-2013.

Crude oil and NGL production decreased due to higher number of stoppages, to interruption of Frade field production, to platforms SS-11 and P-34 that departed from Baúna and Jubarte fields, respectively, besides the natural decline in production from fields.

Production started-up in FPSO Cidade de Anchieta in the Baleia Azul field, FPSO Cidade de São Paulo in the Sapinhoá field and FPSO Cidade de Itajaí in the Baúna field.

Natural gas production increased due to the higher efficiency of Mexilhão field and to the production start-up in FPSO Cidade de Santos in the Uruguá field.

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(*) Not revised by independent auditor.

⁷ Does not include LNG. Includes reinjected gas.

Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes increased by 14% in the 1Q-2013 compared to the 1Q-2012. Excluding the impact of the appreciation of the U.S. dollar it increased by 22% due to the higher number of well maintenances in the Marlim, Barracuda, Espadarte and Roncador fields, the production start-up in FPSOs Cidade de Anchieta (Baleia Azul), Cidade de São Paulo (Sapinhoá) and Cidade de Itajaí (Baúna), as well as higher employee compensation costs arising from the 2012 Collective Bargaining Agreements and lower production volumes.

Lifting Cost - Including production taxes

Lifting cost including production taxes decreased by 6% in the 1Q-2013 compared to the 1Q-2012. Excluding the impact of the appreciation of the U.S. dollar it decreased by 2% due to the lower average reference price for domestic oil (adjusted to reflect international prices) and to the new levels of special participation charges in Marlim, Jubarte, Marlim Leste and Barracuda fields, due to lower production at these fields.

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(*) Not revised by independent auditor.

⁸ Lifting cost was revised to exclude scheduled stoppages expenses. Though lifting cost is a non-GAAP measure, it was revised pursuant to the International Financial Reporting Standards – IFRS. Based on the previous criteria (pursuant to USGAAP), such expenses impacted our lifting cost at the period of their realization, at the moment of the consumption of the materials or completion/rendering of services. Amounts previously reported for 2012 were recalculated for comparability purposes. Such adjustment did not impact our financial statements and EBITDA, for which the amortization of scheduled stoppages was already computed in accordance to the International Financial Reporting Standards – IFRS.

REFINING, TRANSPORTATION AND MARKETING

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

The decreased net loss was due to the higher diesel and gasoline prices in the domestic market, and to the impact of the appreciation of the U.S. dollar on oil products prices that are adjusted to reflect international prices. These effects were partially offset by higher crude oil costs (acquisition/transfer).

Lower oil product imports, due to the higher production, and increased crude oil imports driven by the higher feedstock processed, associated with lower crude oil production.

Lower crude oil export volumes due to the increased feedstock processed and lower production, as well as decreased oil products exports driven by domestic demand growth, mainly fuel oil to thermoelectric power plants.

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(*) Not revised by independent auditor.

  ⁹ Include crude oil export volumes of Refining, Transportation and Marketing and Exploration & Production segments.

Daily feedstock processed increased by 11% due to the sustainable improvement of operating efficiency of the refineries, setting up a new level of processing capacity of 2,079 Mbpd. Such level was reached after exhausting tests to raise the distillation feedstock processing respecting the project limits of equipments and the safety, environment and product quality requirements. These adjustments were also possible due to the production start-up of ten new conversion and quality units in 2012.  

Refining cost decreased by 16% in the 1Q-2013 compared to the 1Q-2012. Excluding the impact of the appreciation of the U.S. dollar, it decreased by 5%, due to higher feedstock processed and lower routine maintenance and repair expenses, partially offset by higher employee compensation costs arising from the 2012 Collective Bargaining Agreements.

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(*) Not revised by independent auditor.

10  Installed capacity considers the maximum sustainable feedstock processing reached at the distillation units, respecting the project limits of equipments and the safety,  environment and product quality requirements. It is lower than the authorized capacity set by ANP (including temporary authorizations) and by environmental institutions.

11  Utilization of nominal capacity of crude oil processing is the relation between the installed capacity and the feedstock processed of domestic crude oil.

12  Feedstock processed – Brazil includes NGL processing.

13  Refining cost was revised to exclude scheduled stoppages expenses. Though lifting cost is a non-GAAP measure, it was revised pursuant to the International Financial Reporting Standards – IFRS. Based on the previous criteria (pursuant to USGAAP), such expenses impacted our refining cost at the period of their realization, at the moment of the consumption of the materials or completion/rendering of services. Amounts previously reported for 2012 were recalculated for comparability purposes. Such adjustment did not impact our financial statements and EBITDA, for which the amortization of scheduled stoppages was already computed in accordance with the International Financial Reporting Standards – IFRS.

GAS & POWER

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income increased due to higher electricity generation and higher average electricity prices, mainly due to lower reservoir levels, causing higher differences settlement prices.   

These effects were partially offset by higher natural gas and LNG import costs to meet the thermoelectric demand.

Electricity sales volumes decreased due to the lower average prices at the spot market.

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

LNG and Bolivian natural gas import volumes increased to meet the domestic thermoelectric demand.

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(*) Not revised by independent auditor.

¹⁴ 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 biofuel operations remained flat in the period due to the lower biodiesel trade margins, partially offset by the improved results from investments in the ethanol sector and by the impact of the appreciation of the U.S. dollar.

DISTRIBUTION 

Net Income Attributable to the Shareholders of Petrobras

(US$ million)

Net income was higher due to a 9% increase in average sales prices and to a 7% increase in sales volumes. These effects were partially offset by higher selling expenses, mainly due to increased personnel and freight expenses.

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(*) Not revised by independent auditor.

¹⁵ 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 lower sales volumes in Nigeria, driven by lower sales prices, reflecting lower international prices.

Crude oil and NGL production increased due to the higher volume from U.S. fields (first oil production of Cascade and Chinook in 2012). This effect was partially offset by: i) decreased production in Nigeria driven by gas injection problems in the Akpo field; ii) end of the contract of Upia field in Colombia; and iii) the lower production in Argentina due to the natural decline of mature fields.

Decreased natural gas production in Argentina due to the well maintenances in Santa Cruz and to the weather conditions in Neuquina Basin, partially offset by the higher natural gas production in Bolivia due to the higher Brazilian demand.

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(*) Not revised by independent auditor.

¹⁶ 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 increased production costs in the Cascade field as from February 2012 and in the Chinook field as from September 2012, both in the United States, as well as higher well maintenance costs and natural decline of mature fields in Argentina.

Lower feedstock processed in the United States, due to light oil processing bottleneck and a lower intermediate crude oil feedstock processed.  A delay in crude oil supply and inventory bottleneck were experienced in Japan due to a maintenance in two fuel oil tanks. There was also an 8-day operating stoppage in Baía Blanca, in Argentina, in March 2013, by a legal decision.

Refining cost was higher due to the lower feedstock processed and to higher insurance costs in the United States.

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(*) Not revised by independent auditor.

17 Lifting and refining costs were revised to exclude scheduled stoppages expenses. Though lifting cost is a non-GAAP measure, it was revised pursuant to the International Financial Reporting Standards – IFRS. Based on the previous criteria (pursuant to USGAAP), such expenses impacted our lifting and refining costs at the period of their realization, at the moment of the consumption of the materials or completion/rendering of services. Amounts previously reported for 2012 were recalculated for comparability purposes. Such adjustment did not impact our financial statements and EBITDA, for which the amortization of scheduled stoppages was already computed in accordance with the International Financial Reporting Standards – IFRS.

Sales Volumes – (Mbbl/d) ^(*)

Our domestic sales volumes increased by 9% in the 1Q-2013 compared with 1Q-2012, primarily due to:

·         Gasoline (a 6% increase) – due to the increase in the flex-fuel automotive fleet, higher competitive advantage relative to ethanol in most Brazilian federal states and to the decreased market share of our competitors;

·         Diesel (a 7% increase) – due to the increase in the retail sector, along with higher thermoelectric consumption and  higher grain harvest;

·         Natural gas (a 29% increase) – due to higher thermoelectric demand, driven by lower water reservoir levels at hydroelectric power plants;

·         Fuel oil (a 57% increase) – due to the increased consumption at thermoelectric plants for electricity generation and to the higher usage in some companies, to increase the supply of natural gas for thermoelectric plants.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows Data – Summary ¹⁸

At March 31, 2013, we had cash and cash equivalents of US$ 13,524 million  compared with US$  13,520  million  at December 31, 2012. 

Net cash provided by operating activities increased by 31% in the 1Q-2013 (US$  7,455   million) compared with the 4Q-2012 (US$ 5,675 million), driven by the positive effect of higher diesel and gasoline prices in the domestic market (adjusted in January and March 2013) and lower oil product imports on gross margins. These effects were partially offset by decreased crude oil production and exports in the 1Q-2013 compared with the 4Q-2012. 

Net cash used in investing activities decreased from US$ 10,262 million in the 4Q-2012 to US$  8,177 million in the 1Q-2013, mainly due to lower investments in business areas, specially Exploration & Production and Refining, Transportation and Marketing.

Cash provided by long-term financing, net of repayments decreased from US$ 3,132 million in the 4Q-2012 to US$ 567 million in the 1Q-2013 due to the bonds issued in the european market in October 2012.

Cash provided by long-term financing (US$ 567 million) along with cash provided by operating activities (US$  7,455   million) sourced more than our capital expenditures needs and repayment of debts, hence our cash and cash equivalents increased by US$ 4 million in the 1Q-2013.

Our adjusted cash and cash equivalents¹⁹ reached US$ 22,972 million at March 31, 2013 (which includes government securities with maturity of more than 90 days of US$  9,448  million), 3% lower compared with US$  23,732  million at December 31, 2012.

		U.S.$ million
		03.31.2013		12.31.2012		%
Cash and cash equivalents		13,524		13,520		-
Government securities		9,448		10,212		(7)
Adjusted cash and cash equivalents 19		22,972		23,732		(3)

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¹⁸ For more details, see the Consolidated Statement of Cash Flows Data on page 19.

¹⁹ 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 the 1Q-2013 we invested an amount of US$9,907 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 March 31, 2013 the net debt in U.S. dollars was 3% higher than at December 31, 2012, due to the accrual of interests and to the lower adjusted cash and cash equivalents.                              

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²⁰ Includes finance lease obligations (Current debt: US$ 19 million on March 31, 2013 and US$18 million on December 31, 2012; Non-current debt: US$  88 million on March 31, 2013 and US$86 million on December 31, 2012). 

²¹ 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.

²² Total liabilities net of adjusted cash and cash equivalents.

FINANCIAL STATEMENTS

Income Statement – Consolidated

Statement of Financial Position – Consolidated ²³

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²³  Some amounts of 2012 were adjusted by the adoption of the IAS 19 amendment, that eliminated the “corridor approach” for the recognition of actuarial gains or losses (see Note 2.2 of the Consolidated Financial Statements Report in U.S. dollars of March 31, 2013).

Statement of Cash Flows Data – Consolidated  

Consolidated Income Statement by Segment