Consolidated net income attributable to the shareholders of Petrobras reached R$7,693 million in the 1Q-2013.  Adjusted EBITDA reached R$16,231 million in the 1Q-2013, 36% higher compared to the 4Q-2012.

Highlights

The Company reported 1Q-2013 earnings of R$ 7,693 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 36% increase in the Adjusted EBITDA, 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.

Comments from the CEO

Mrs. Maria das Graças Silva Foster

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 R$ 9.8 billion, an increase of 72% 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 R$ 7.7 billion, in line with the net income of the 4Q12, which benefited from R$ 2.1 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 R$ 646 million. During the first quarter, we were able to save R$ 1.3 billion, which is one third of the 2013 target (R$ 3.8 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

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

      ² Calculated based on net income before financial results, share of profit of equity-accounted investments and income taxes.

      ³ EBITDA + share of profit of equity-accounted investments and impairment.

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

RESULTS OF OPERATIONS

1Q-2013 x 4Q-2012 Results:

Gross Profit

Gross profit was 14% higher (R$ 2,294 million), mainly due to:

Ø Sales revenues of R$ 72,535 million, 1% lower compared to the 4Q-2012, due to the decreased domestic demand (3%), mainly of diesel (7%) and gasoline (5%), and lower crude oil exports generated by lower production and higher feedstock processed. These effects were partially offset by the increase of diesel and gasoline prices in January and March and by increased oil product exports.

Ø Costs of sales of R$ 53,679 million, 6% lower compared to the 4Q-2012 due to the lower share of oil product imports over sales volumes, mainly due to the 3% decrease on domestic sales volume and to increased domestic oil product production.

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 taxesincreased by 72% (R$ 4,110 million), mainly due to the higher gross profit, to lower write-offs of dry or sub-commercial wells in Brazil (R$ 656 million) and to the decrease in other operating expenses (R$ 658 million) that were impacted by impairment charges in the 4Q-2012.

Net finance income (expense)

Positive net finance income was R$ 1,390 million, mainly as a result of the exchange variation gain on net debt (impact of 1.5% from the appreciation of the Real relative to the U.S. dollar). In the 4Q-2012, the positive net finance income of R$ 2,788 million was impacted by the recognition of gains on disposal of National Treasury Notes – B Series (NTN-B) and by the monetary updating of judicial deposits (R$2,635 million).

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached R$ 7,693 million, flat compared to the 4Q-2012. The increase of net income before financial results, share of profit of equity-accounted investments and income taxes (72%) was partially offset by the lower net finance income and by the higher income tax expenses on net income that in the 4Q-2012 were reduced by the tax benefit of R$ 2,131 million from the deduction of interest on capital.

RESULTS OF OPERATIONS

1Q-2013 x 1Q-2012 Results:

Gross Profit

Gross profit was 7% lower (R$ 1,388 million), mainly due to:

Ø Sales revenues of R$ 72,535 million, 10% higher compared to the 1Q-2012, reflecting:

·    Higher oil product prices in the domestic market due to increased gasoline and diesel prices, to higher electricity prices besides 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 exports volumes due to higher feedstock processed and to lower crude oil production.

Ø Cost of sales of R$ 53,679 million, 17% 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.

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 R$ 9,849 million, a 16% decrease compared to the 1Q-2012, due to the lower gross profit and to a 6% increase in operating expenses, mainly as a result of higher exploration costs (R$271 million), reflecting higher geology and geophysics expenses.

Net finance income (expense)

Positive net finance income of R$1,390 million, R$ 925 million higher compared to the 1Q-2012, driven by positive exchange variation effects on a higher net debt.

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached R$ 7,693 million in the 1Q-2013, a 17% decrease (R$1,521 million) compared to the 1Q-2012, mainly reflecting the lower net income before financial results, share of profit of equity-accounted investments and income taxes and the higher income tax expenses on net income that in the 1Q-2012 were reduced by the tax benefit of R$ 887 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 charged at internal transfer prices defined between the areas using methods based on market parameters.

EXPLORATION & PRODUCTION

(*) Not revised by independent auditor.

⁵  Does not include LNG. Includes gas reinjection.

Lifting Cost - Excluding production taxes – U.S.$/barrel

Lifting Cost - Including production taxes – U.S.$/barrel

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(*) Not revised by independent auditor.

⁶ 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 as Depreciation, Amortization and Depletion according to the period of realization.

FINANCIAL HIGHLIGHTS

8

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(*) Not revised by independent auditor.

8  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.

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

10  Feedstock processed – Brazil includes NGL processing.

11 Refining cost was revised to exclude scheduled stoppages expenses. Though refining 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 as Depreciation, Amortization and Depletion according to the period of realization.

GAS & POWER

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(*) Not revised by independent auditor.

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

BIOFUEL

DISTRIBUTION

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INTERNATIONAL 

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   ^(*)

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.

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(*) Not revised by independent auditor.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows Data – Summary ¹⁵

At March 31, 2013, we had cash and cash equivalents of R$ 27,235 million  compared with R$ 27,628 million  at December 31, 2012. 

Net cash provided by operating activities increased by 27% in the 1Q-2013 (R$ 14,879 million) compared with the 4Q-2012 (R$ 11,677 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 period.

Net cash used in investing activities decreased from R$ 21,121 million  in the 4Q-2012 to R$ 16,320 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 R$ 6,448 million  in the 4Q-2012 to R$ 1,133 million  in the 1Q-2013 due to the bonds issued in the European market in October 2012.

Cash provided by long-term financing (R$ 1,133 million) along with cash provided by operating activities (R$ 14,879 million) sourced more than our capital expenditures needs and repayment of debts, hence our cash and cash equivalents increased by R$ 393 million in the 1Q-2013.

Our adjusted cash and cash equivalents¹⁶ reached R$ 46,262 million at March 31, 2013 (which includes government securities with maturity of more than 90 days of R$ 19,027 million), 5% lower compared with R$ 48,497 million at December 31, 2012.

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¹⁵ For more details, see the Consolidated Statement of Cash Flows Data on page 20.

¹⁶ 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

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 R$ 19,769 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

The net debt of the Consolidated Petrobras Group in Reais increased by 2% over December 31, 2012, due to the accrual of interests and to the lower adjusted cash and cash equivalents.

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¹⁷ Includes Capital lease obligations (R$39 million on March 31, 2013 and R$ 37 million on December 31, 2012).

¹⁸ Includes Capital lease obligations (R$178 million on March 31, 2013 and R$ 176 million on December 31, 2012).

¹⁹ Our  net debt is not computed in accordance with International Standards -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.

²⁰ Total liabilities net of adjusted cash and cash equivalents.

FINANCIAL STATEMENTS

Income Statement – Consolidated

Statement of Financial Position – Consolidated ²¹