Consolidated net income attributable to the shareholders of Petrobras reached US$8,334 million in Jan-Sep/2013 and US$1,484 million in the 3Q-2013.  Adjusted EBITDA reached US$22,594 million in Jan-Sep/2013.

Highlights

 The Company reported 3Q-2013 earnings of US$1,484 million and the following highlights: 

·     Domestic crude oil and NGL production remained flat. On September 2, 2013, the Company reached a record production level of 337 thousand bpd in the Pre-Salt area.

·     Record diesel demand levels partially met by domestic production, with the remaining portion met by imports.

·     The differential between domestic prices and international prices of oil products has increased, reflecting the appreciation of the U.S. dollar against the Brazilian Real and higher international prices of oil products.

·     Continuation of the divestiture program of assets in Brazil and abroad, with the conclusion of the disposal of BS-4 Atlanta and Oliva blocks in the Santos basin and of the Coulomb block in the Gulf of Mexico, resulting in a gain of US$ 243 million. Cash proceeds from the disposal of assets in the 3Q-13 were US$ 522 million.

·     A new discovery was announced in the pre-salt layer of Santos Basin (Iguaçu Mirim) and the production potential of Farfan 1 and Muriú 1, located at ultra-deep areas of Sergipe Basin, was confirmed.

·     For the eighth consecutive year, we were listed on the Dow Jones Sustainability World Index, the world’s most important sustainability index that evaluates social, environmental and economic management best practices in the world.

·     On October 21, 2013, Petrobras was awarded a 40% interest in the winning consortium of the Libra block auction, located in the ultra-deep waters of the Santos Basin, in the pre-salt area, with a US$ 3 billion signature bonus to be paid, relative to its share of the investment.

Comments from the CEO
Mrs. Maria das Graças Silva Foster

Dear Shareholders and Investors,

Petrobras´s oil production in Brazil during the third quarter was similar to second quarter production. However, output in September was 3.7% higher than the output registered in August and 4.8% higher than July, primarily as a result of less planned maintenance.  I would like to point out that our reservoirs have been showing higher-than-expected productivity and that our operating efficiency has reached 75% at the Campos Basin Operating Unit (UO-BC) and 92% at the Rio Operating Unit (UO-RIO), allowing us to recover 65,000 barrels per day in output during this quarter through the Campos Basin Operational Efficiency Improvement Program (PROEF). With an overall cost of US$ 1.3 billion since its implementation, PROEF efforts have already led to gains of US$ 1.5 billion in net present value (NPV).

It was not possible to achieve higher output levels during this third quarter primarily due to: (i) a start-up delay of P-63 (Papa Terra), from July 15th to October 31st, given the need to change the subsea array to avoid interference with living coral that was improperly misinterpreted in July 2008, but recently identified following an inspection with remotely operated underwater vehicles; (ii) delay of 275 days (9 months) by Norwegian company Subsea 7 in the provision of the Uncoupled Gathering Systems (buoys), built in China for the FPSO Cidade de São Paulo, postponing the interconnection of the second production well from April 2013 to January 2014; and (iii) the shortage of pipe-laying support vessels (PLSV´s), given the difficulty of contracting units built in Brazil between 2010 and 2011. In 2012, the Executive Board authorized to contract 10 PLSV´s, of which 8 will be built abroad and 2 to be built in Brazil.

In Refining, despite a reduction in throughput in 3Q-2013 from 2Q-2013 due to planned maintenance at the REDUC, REGAP and REVAP refineries, the production of diesel (+1.1%) and gasoline (+2.1%) increased during the period. In spite of the higher production, record consumption of diesel in Brazil exceeding 1,000,000 barrels per day (peak of 1,169,000 bpd on August 30th), leading to increased imports during the period.  The sharp depreciation of the Real (peak of R$ 2.45/US$ on August 22 th) combined with an increase in international oil prices (peak of US$ 118.11/bbl on August 28 th), increasing the negative differential between domestic and international prices.

Our net income before financial results, share of profit of equity-accounted investments and income taxes amounted to       US$ 2.4 billion, a reduction of 55% from the second quarter of the year. Besides the effects of the pricing differential at a moment of strong demand, we also experienced higher costs with dry/subcommercial wells, although in line with our forecast, and less extraordinary revenue from the sale of assets during the quarter when compared to the second quarter. Net income attributable to shareholders of Petrobras was US$ 1.5 billion, 50% lower than the 2Q-2013, for the reasons stated above and offset, in part, by the improved financial result.

Despite four diesel and two gasoline price increases in the last 16 months, totaling 21.9% and 14.9% respectively, the strong depreciation of the Real against the U.S. Dollar since May 2013, (as high as 22%), has led to an increase in the price differential during the past few months.

This situation has been affecting our cash flow and leverage. Therefore, in order to assure the sustainability of our 2013-2017 Business and Management Plan, in which the alignment of domestic and international prices is a premise, the Executive Board designed and presented to the Board of Directors a fuel pricing methodology to be applied by the Company, whereby the alignment of diesel and gasoline domestic prices to international prices will become more predictable.

We continue to work tirelessly to achieve the targets outlined in the 2013-2017 BMP through our structuring programs. I would like to point out the PRODESIN (Divestment Program), which have totaled US$ 4.8 billion in 2013, and the PROCOP (Operating Expenses Optimization Program), which has saved US$ 2.3 billion till September, already surpassing the target of US$ 1.8 billion in 2013.

I would also like to praise the engagement of Petrobras’ Engineering Department, which has been working night and day to complete 9 production units this year, totaling 1,000,000 barrels per day in capacity: FPSOs Cidade de São Paulo, Cidade de Itajaí, Cidade de Paraty, P-63, P-55 and P-58, already completed, in addition to P-62, P-61 and TAD (Tender Assisted Drilling), which have already reached more than 92.5% in physical completion.

We would like to bring to your attention the fact that the credit rating agency Moody’s has downgraded Petrobras’ foreign and domestic currency debt rating; however it has maintained our Baa1 investment grade, one level above Brazil’s rating. This review, according to Moody’s, reflects financial leverage and expectation of negative cash flow in the next few years due to the implementation of the company’s robust Investment Plan.

Our investment plan is indeed robust, due to the size of our reserves in both pre-salt and post-salt horizons and the opportunities to develop them with demonstrated know-how and capacity. These production development projects will increase our oil and gas production, bringing needed increase in operating cash flow generation, which will be additive to the beneficial effect of price alignment that we are pursuing. Thus we expect to reduce over the coming months our leverage and indebtedness indicators.

Lastly, I would like to point out the satisfactory outcome we achieved in the Libra Oilfield Auction, the first to be developed under the production sharing agreement in Brazil. One more challenge, undoubtedly, which will require the application of sound management practices, among them cost and time optimization in the exploration, evaluation and production development phases. I am convinced that the Libra field, which we will develop along with the partners Shell, Total, CNPC and CNOOC, which have well-known experience, abilities and financial robustness, will contribute to generate rising returns for our shareholders and investors, given that we are dealing with an exceptional asset that is fundamental for the sustainability of our oil production, particularly after 2020.

Maria das Graças Silva Foster

Chief Executive Officer

¹ Net income per share calculated based on the weighted average number of shares.

² Gross margin equals sales revenues less cost of sales divided by sales revenues; Operating margin equals net income before financial results, share of profit of equity-accounted investments and income taxes divided by sales revenues; Net margin equals net income divided by sales revenues.

³ Adjusted EBITDA equals net income plus net finance income (expense); income taxes; depreciation, depletion and amortization; share of profit of equity-accounted investments; and impairment. Adjusted EBITDA is not an IFRS measure and it is possible that it may not be comparable with indicators with the same name reported by other companies. Adjusted EBITDA should not be considered as a substitute for operational profit or as a better measure of liquidity than operational cash flow, both of which are calculated in accordance with IFRS. We provide our Adjusted EBITDA to give additional information about our capacity to pay debt, carry out investments and cover working capital needs.  See Consolidated Adjusted EBITDA Statement by Segment on page 23 for a reconciliation of our Adjusted EBITDA.

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

4

FINANCIAL HIGHLIGHTS

RESULTS OF OPERATIONS

Jan-Sep/2013 compared with Jan-Sep/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 2013 (a 10% 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 decreased by 10% in Jan-Sep/2013 compared to Jan-Sep/2012, mainly due to: 

Ø Sales revenues of US$ 105,869 million decreased 2% compared to Jan-Sep/2012, driven by the appreciation of the U.S. dollar.

Excluding foreign currency translation effects, local currency sales revenues were 8% higher, due to:

·   Higher oil product prices in the domestic market resulting from adjustments in gasoline and diesel prices, from higher electricity prices and from the impact of the appreciation of the U.S. dollar on oil product prices that are adjusted to reflect international prices;

·   A 7% increase in domestic demand, mainly of gasoline (5%), diesel (6%), fuel oil (26%) and natural gas (22%), offset by lower crude oil export volumes attributable to lower production levels and higher feedstock processed.

Ø Cost of sales of US$ 80,135 million remained flat when compared to Jan-Sep/2012, due to:

·   A 5% increase in domestic sales volumes of oil products, met by higher domestic output;

·   Higher volumes of natural gas imports to meet the thermoelectric demand and an increase in crude oil import volumes driven by the higher feedstock processed in our refineries, as well as higher costs due to the impact of the appreciation of the U.S. dollar (10% impact);

·   Increased crude oil production costs, due to the higher number of well interventions and to the production start-up of new systems, which are still not producing in full capacity;

·   Excluding the foreign currency translation effects, the local currency cost of sales was 10% higher.

Net income before finance expense, share of profit of equity-accounted investments and income taxes

Net income before finance expense, share of profit of equity-accounted investments and income taxes reached               US$ 12,702 million in Jan-Sep/2013, a 7% decrease compared to Jan-Sep/2012, due to lower gross profit and higher employee compensation expenses arising from the 2012 Collective Bargaining Agreement, as well as to the accrual of costs related to the 2013 Collective Bargaining Agreement. These effects were partially offset by a decrease in write-offs of dry and sub-commercial wells (US$ 777 million) and by gains on disposal of assets.

Net finance income (expense)

Net finance expense was US$ 1,465 million in Jan-Sep/2013, a US$ 1,816 million decrease (55%) compared to Jan-Sep/2012, mainly resulting from the decrease in the foreign exchange exposure attributable to the impact of the extension of our hedge accounting practice to future exports⁵, reducing by US$ 4,054 million the impact of foreign currency effects on our finance expenses.

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached US$ 8,334 million in Jan-Sep/2013, a 15% increase compared to Jan-Sep/2012 (US$ 7,271 million), reflecting the lower impact of foreign currency effects on our finance expenses and higher share of profit of equity-accounted investments.

FINANCIAL HIGHLIGHTS

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 was lower due to decreased crude oil and NGL production, higher depreciation of equipment costs, higher employee compensation costs, higher well interventions and maintenance costs, as well as increased freight costs for oil platforms. These effects were partially offset by higher domestic crude oil prices (sale/transfer) and lower write-offs of dry or sub-commercial wells.

The spread between the average domestic oil price (sale/transfer) and the average Brent price increased from US$6.09/bbl in 2012  to US$9.81/bbl in 2013. 

Crude oil and NGL production decreased mainly due to the natural decline of our fields, partially offset by the production start-up of FPSOs Cidade de Anchieta (Baleia Azul), Cidade de São Paulo (Sapinhoá), Cidade de São Vicente (Extended Well Test – EWT of Sapinhoá Norte), Cidade de Itajaí (Baúna) and Cidade de Paraty (Lula NE Pilot).

Natural gas production increased due to the production start-up of FPSOs Cidade de Anchieta, Cidade de São Paulo and Cidade de Paraty, to the improved efficiency of the Mexilhão, Merluza and Lula fields and to the improved production potential of FPSO Cidade de Vitoria.

FINANCIAL HIGHLIGHTS

 Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes increased by 8% in Jan-Sep/2013 compared to Jan-Sep/2012. Excluding the impact of the appreciation of the U.S. dollar against the Brazilian Real, it increased by 15% due to the higher number of well interventions in the Campos Basin, mainly driven by the PROEF (Operational Efficiency Increase Program), to the production start-up in FPSOs Cidade de Anchieta (Baleia Azul), Cidade de São Paulo (Sapinhoá), Cidade de Paraty (Lula NE Pilot) and Cidade de Itajaí (Baúna), with higher initial unit costs, as well as higher employee compensation costs arising from the 2012 Collective Bargaining Agreement and accrual of employee compensation costs related to the 2013 Collective Bargaining Agreement under negotiation.

Lifting Cost - Including production taxes

Lifting cost including production taxes decreased by 3% in Jan-Sep/2013 compared to Jan-Sep/2012. Excluding the impact of the appreciation of the U.S. dollar against the Brazilian Real it remained relatively flat in the period. Production taxes excluding foreign exchange variation effects were 10% lower driven by the decrease in the average reference price for domestic oil in U.S. dollars (adjusted to reflect international prices) and to the new levels of special participation charges in Marlim, Jubarte and Barracuda fields, due to lower production.
 

FINANCIAL HIGHLIGHTS

REFINING, TRANSPORTATION AND MARKETING

 The decreased net loss is attributable to diesel and gasoline price adjustments in the domestic market and to the higher feedstock processed in our refineries, reducing the share of oil product imports in our sales mix, partially offset by higher crude oil acquisition/transfer costs.

Higher crude oil imports are attributable to higher feedstock processed.

Lower crude oil export volumes are attributable to a decrease in crude oil production and an increase in feedstock processed, as well as decreased oil products exports in order to meet domestic demand. Oil product imports were lower, due to an increase in the production at our refineries.

FINANCIAL HIGHLIGHTS

Daily feedstock processed increased by 8% in Jan-Sep/2013 compared to Jan-Sep/2012 due to the start-up of new value addition (quality) units and conversion units, as well as to the sustainable improvement of operating efficiency of our refineries through optimization of refining processes and removal of logistics bottlenecks. The new production level was reached respecting the project limits of equipments and the safety, environment and product quality requirements.

Refining cost decreased by 9% in Jan-Sep/2013 compared to Jan-Sep/2012. Excluding the impact of the appreciation of the U.S. dollar against the Brazilian Real, it increased by 1%, mainly due to higher employee compensation costs arising from the 2012 Collective Bargaining Agreement and to the accrual of employee compensation costs related to the 2013 Collective Bargaining Agreement under negotiation, partially offset by increased feedstock processed and reduced routine maintenance costs.
 

FINANCIAL HIGHLIGHTS

GAS & POWER

Net income increased due to higher thermoelectricity generation and higher average electricity prices, mainly attributable to lower water reservoir levels.

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

Electricity sales volumes were 12% lower due to the decrease in the spot market demand, resulting from a new regulation (CNPE 03/2013).

Increased electricity generation (139%) and difference settlement prices (105%) due to lower rainfall levels in the period.

Higher imports of LNG (108%) and of natural gas from Bolivia (19%) due to increased thermoelectric demand in the period.

FINANCIAL HIGHLIGHTS

BIOFUEL

Losses on biofuel operations remained flat in the period. Excluding the exchange variation effect, biofuel losses were 8% higher resulting from lower biodiesel average realization prices (5%), as well as higher raw materials costs and inventory write-downs of palm seedlings. These effects were partially offset by lower losses in share of profit of ethanol investments due to higher sugar sales volume.

DISTRIBUTION

 Net income was higher due to a 13% increase in the average trade margins and a 6% increase in sales volumes. These effects were partially offset by higher freight and employee compensation expenses, resulting from salary increases arising from the 2012 Collective Bargaining Agreement and accrual of 2013 amounts, which are still under negotiation.

Despite the higher sales volume, market share decreased due to a margin repositioning.

FINANCIAL HIGHLIGHTS

INTERNATIONAL

Net income was higher due to the gains on disposal of assets within the Divestment Program (PRODESIN), mainly in Africa and in the United States, partially offset by lower crude oil and NGL production.

Crude oil and NGL production decreased 15% due to the disposal of 50% of our interest in companies in Africa (mainly in Nigeria) in June 2013. As from June 2013, the remaining 50% of the production has been considered non-consolidated production.

Decreased natural gas production, mainly in Argentina, due to the closing of a natural gas well in the Santa Cruz field, resulting from an increase in water production.

FINANCIAL HIGHLIGHTS

Lifting cost was 5% higher driven by higher costs in Argentina due to well maintenance services, higher electricity charges and environmental repair services in production storage tanks. Costs were higher also due to the disposal of investments in Nigerian companies, which had relatively low costs.

Lower feedstock processed (9%), as well as lower output of oil products and utilization of nominal capacity, mainly at the Japanese refinery due to unscheduled stoppages occurred in 2013 and to lower oil products demand. Feedstock processed was also lower in the United States, resulting from operating restrictions for unconventional light oil (Eagleford) processing, and from the stoppage of the distillation unit in August for decoking of the distillation oven.

International refining cost was 9% higher due to the lower feedstock processed in Japan and higher insurance costs in the United States.

FINANCIAL HIGHLIGHTS

Sales Volumes – (Mbbl/d) ^(*)

Our domestic sales volumes increased by 7% in Jan-Sep/2013 compared with Jan-Sep/2012, primarily due to:

·         Diesel (a 6% increase) – due to the increase in the retail sector, along with higher thermoelectric consumption, higher grain harvest and an increase in the diesel light vehicle fleet (vans, pickups and SUV).

·         Gasoline (a 5% increase) – due to the increase in the flex-fuel automotive fleet, driven by the higher competitive advantage relative to ethanol in most Brazilian federal states and to the decreased market share of our competitors. These effects were partially offset by the increase of the hydrated ethanol content of Type C gasoline (from 20% to 25%).

·         Fuel oil (a 26% increase) – due to the increased consumption at thermoelectric plants for electricity generation and higher demand in some companies to supply natural gas to thermoelectric plants.

·         Natural gas (a 22% increase) – due to higher thermoelectric demand, driven by lower water reservoir levels at hydroelectric power plants.

FINANCIAL HIGHLIGHTS

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows Data – Summary¹⁶

Net cash provided by operating activities decreased US$ 658 million in Jan-Sep/2013 (US$ 21,555 million) compared to Jan-Sep/2012 (US$ 22,213 million). Excluding the appreciation of the U.S. dollar, net cash provided by operating activities increased by 7%, driven by the positive effect of adjustments in diesel and gasoline prices in the domestic market in 2012 and 2013 and the 7% increase in oil products output, partially offset by the impact of the depreciation of the Real on oil product and LNG import costs, as well as lower crude oil export volumes. Net cash provided by operating activities decreased by 20% in the 3Q-2013 (US$ 1,552 million) compared to the 2Q-2013, resulting from higher import volumes and from the negative effect of exchange rate changes on our costs.

Cash used in investments in operating segments increased by 7% in Jan-Sep/2013 compared to Jan-Sep/2012 (US$ 1,990 million) mainly due to higher investments in Exploration & Production and Refining, Transportation and Marketing activities, and decreased by 5% (US$ 555 million) in the 3Q-2013 compared to the 2Q-2013. These effects were partially offset by proceeds of US$ 2,064 million (US$ 522 million in the 3Q-2013) related to disinvestments occurred within the Divestment Program.

Proceeds from long-term financing, net of repayments increased from US$ 5,954 million in Jan-Sep/2012 to US$ 14,022 million in Jan-Sep/2013, mainly due to the issuance of bonds (US$ 11 billion) in the U.S. Market in May 2013, along with additional banking financing. In the 3Q-2013 there were net repayments of US$ 1,657 million.

Cash from long-term financing, net of repayments (US$ 14,022million) along with cash from operating activities (US$ 21,555 million) and the US$ 2,064 million from divestments was more than necessary to meet our needs for capital expenditures, repayment of debts and payment of dividends, and as a result our adjusted cash and cash equivalents¹⁷ increased by US$ 2,223 million in Jan-Sep/2013 (and our cash and cash equivalents increased by US$ 4,126 million). In the 3Q-2013, cash from operating activities (US$ 6,274 million) was less than necessary to meet our needs for capital expenditures in operating segments (US$ 10,640 million), net repayments of debts and payment of dividends (US$ 2,926 million). Thus adjusted cash and cash equivalents decreased by US$ 6,885 million in the 3Q-2013 compared to the 2Q-2013.

On September 30, 2013, we had cash and cash equivalents of US$ 17,646 million compared to US$ 13,520 million  on December 31, 2012 and with US$ 23,131 million on June 30, 2013. Our adjusted cash and cash equivalents, including government securities with maturity of more than 90 days, reached US$ 25,955 million on September 30, 2013, 9% higher compared with US$ 23,732 million on December 31, 2012 and 21% lower compared to US$ 32,840 million on June 30, 2013.

FINANCIAL HIGHLIGHTS

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 nine-month period ended September 30, 2013, we invested an amount of US$ 32,656 million, primarily aiming at increasing production and modernizing and expanding our refineries.

FINANCIAL HIGHLIGHTS

Consolidated debt

On September 30, 2013 the net debt in U.S. dollars was 20% higher than on December 31, 2012, due to the long-term financing raised, partially offset by the impact of 9.1% from the appreciation of the U.S. dollar against the Real.

FINANCIAL HIGHLIGHTS

FINANCIAL STATEMENTS

Income Statement - Consolidated

FINANCIAL HIGHLIGHTS

Statement of Financial Position – Consolidated²²

FINANCIAL HIGHLIGHTS

Statement of Cash Flows Data – Consolidated

FINANCIAL HIGHLIGHTS

SEGMENT INFORMATION

Consolidated Income Statement by Segment – Jan-Sep/2013