Consolidated net income attributable to the shareholders of Petrobras reached R$9,214 million in the first quarter of 2012. EBITDA in the first quarter of 2012 was R$16,521 million, 4% higher compared to the first quarter of 2011.

·         Our total domestic and international oil and natural gas production increased 2% in the first quarter of 2012 compared to the first quarter of 2011, due mainly to production in the Jubarte, Marlim Sul, Caratinga, Albacora, Mexilhão and Uruguá fields, as well as to the pre-salt contribution of the Lula field.

·         Start-up of production of Cascade deep water field situated in the Gulf of Mexico.

·         Discoveries in the pre-salt layer of the Santos Basin, specially in the Carioca Sela and Carcará and the one of Campos Basin called Pão de Açúcar. In addition, a new accumulation of oil and gas was discovered in the Solimões Basin situated in the Brazilian state of Amazonas.

·         3% increase in the production of oil products in the first quarter of 2012 compared to the first quarter of 2011.

·         Capital expenditures and investments in the first quarter of 2012 amounted to R$18,020 million, 14% higher compared to the first quarter of 2011, 52% of which was invested in Exploration & Production.

·         The raising of funds of U.S.$7,2 billion of bonds in the international capital markets with maturities of three, five, ten and thirty years.

·         Payment of R$2,609 million of interest on shareholders’ equity in the first quarter of 2012, which corresponds to R$0.20 per share. On March 19, 2012, our shareholders approved in the annual general shareholders’ meeting the payment of dividends in the amount of R$1,565 million. The first portion of interest on shareholders’ equity was provisioned in the amount of R$2,609 million on March 31, 2012, corresponding to R$0.20 per share, estimated to be paid to our shareholders by June 30, 2012.

Dear Shareholders and Investors,

This is the first time that I am addressing you as the CEO of Petrobras. I am honored to assume such a responsibility and would like to make it clear that my style of management will be based on dialog with both the controlling and minority shareholders.

I assure you that I am fully aware of the expertise of this Company’s workforce and its enormous capacity for overcoming challenges, which is unquestionably the main foundation for the execution of our growth project.

My main focus, and that of the entire executive team, will be on executing the business plan, while ensuring operational efficiency and exercising control over costs. Whenever necessary, we will not hesitate to make adjustments and corrections, using the best technical and financial analysis procedures, preserving the liquidity and solvency of the Company and ensuring that it retains its investment grade status.

Petrobras is highly capitalized and has an extraordinary portfolio of oil and gas assets, ensuring a highly promising future. In order to continue growing in a sustainable and profitable manner, we are closely monitoring all phases of the projects in our portfolio, which will allow us to retain the main guidelines of the previous management, albeit with a more precise degree of supervision and the correction of any eventual deviations. 

Petrobras aims to generate business growth and returns and is fully aware of its role as a partner in the development of those countries where it operates, creating the necessary scale for the prosperity of the goods and services industry, particularly in our core market, Brazil. Our results must also reflect the utmost respect for safety and the environment, and consequently, this management will be tireless in its efforts to ensure zero accident and leakage ratios in our operations.

It is in this context that I present you with our results for the first quarter of 2012, re-emphasizing that we are fully committed to and capable of applying all the available resources in a disciplined manner in order to manage one of the world’s best investment portfolios, generating returns for our shareholders, investors and society as a whole.

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

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

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

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

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

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

RESULTS OF OPERATIONS

1Q-2012 x 4Q-2011 Results:

Gross Profit ⁶

Gross profit reached R$20,244 million in the first quarter of 2012, a 17% increase compared to the R$17,306 million in the fourth quarter of 2011, mainly due to:

·         Sales revenues, which increased by 1% to R$66,134 million in the first quarter of 2012 compared to R$65,257 million in the fourth quarter of 2011, primarily due to:

·   The 38% increase of crude oil export volumes, considering the realization of inventories produced at the end of 2011 and also the 1% decrease of domestic crude oil on the feedstock processed and the 1% increase on production, partially offset by the seasonal reduction on diesel sale;

·   Increase in crude oil export prices (8%), as well as in domestic gasoline and diesel prices from November 2011 on, in 10% and 2%, respectively.

·         Cost of sales, which decreased by 4% to R$45,890 million in the first quarter of 2012 compared to R$47,951 million in the fourth quarter of 2011, due to the lower domestic oil products sale, mainly diesel, with reduction of imports on cost of sales mix. The higher oil products imports in the first quarter of 2012, mainly diesel in March 2012, remained in great part in inventory to meet the higher demand from the second quarter of 2012 on. Additionally, the reduction was due to the recognition in the fourth quarter of 2011 of depreciation, depletion and amortization of assets which were already in operation (R$670 million).

Net income before financial results income taxes

Net income before financial results and income taxes increased by 57% to R$11,771 million in the first quarter of 2012 compared to R$7,490 million in the fourth quarter of 2011, due to the R$1,343 million decrease in operating expenses, mainly due to:

·         Lower exploration costs for crude oil extraction (R$491 million);

·         Recognition of losses on the realization of assets - impairment in the fourth quarter of 2011 (R$659 million).

Consolidated net income attributable to the shareholders of Petrobras

Consolidated net income attributable to the shareholders of Petrobras reached R$9,214 million in the first quarter of 2012, a 82% increase compared to the R$5,049 million in the fourth quarter of 2011, reflecting the increase of net income before financial results income taxes.

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⁶  Fore more details, see appendix 1.

FINANCIAL HIGHLIGHTS

RESULTS OF OPERATIONS

1Q-2012 x 1Q-2011 Results:

Gross Profit⁷

Gross profit reached R$20,244 million in the first quarter of 2012, a 2% increase compared to R$19,889 million in the first quarter of 2011, mainly as a result of:

·   Sales revenues, which increased by 22% to R$66,134 million in the first quarter of 2012 compared to R$54,358 million in the first quarter of 2011, due to:

·    Higher exports prices and domestic oil products sales prices generated by the increase in international Brent crude oil prices (13% increase) as well as by the exchange variation effects;

·    Increase in the prices of domestic gasoline (10% increase) and diesel (2% increase) from November 2011 on; and

·    Higher crude oil export volume (20% increase); 10% increase in domestic oil products sales due  to higher demand, mainly of gasoline (24% increase), reflecting its higher competitive advantage compared to ethanol, naphtha (13% increase), diesel (9% increase) and jet fuel (7% increase).

·   Cost of sales, which increased by 33% to R$45,890 million in the first quarter of 2012 compared to the first quarter of 2011, due to:

·    Increase of 10% in domestic oil products sales, mainly for diesel and gasoline, wich were wet mainly by imports;

·    The impact of higher international prices and the exchange variation effects on crude oil, oil products imports and government participation; and

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

   Net income before financial results income taxes

Net income before financial results and income taxes decreased by 4% to R$11,771 million in the first quarter of 2012 compared to R$12,318 million in the first quarter of 2011, due to the 12% increase in operating expenses mainly as a result of:

·   Higher selling expenses (R$269 million increase), due to increased freight costs generated by the higher sales volume and also by the higher personnel expenses arising out of the Collective Bargaining Agreement for 2011;

·   Increased administrative and general expenses (R$252 million increase), generated by higher personnel expenses arising out of the Collective Bargaining Agreement for 2011, by increased workforce and by increased third-party technical services; and

·   Higher other operating expenses (R$383 million increase) ⁸, due to increased losses from legal proceedings.

   Financial Income (Expenses), Net

Financial income (expenses), net reached R$465 million in the first quarter of 2012, a 77% decrease compared to R$2,048 million in the first quarter of 2011, mainly as a result of:

·   The lower exchange variation gain on net debt; and

·   Decreased financial income from financial investments due to the lower investment volume and to the decreased interest rates in Brazil.

   Consolidated net income attributable to the shareholders of Petrobras

Consolidated net income attributable to the shareholders of Petrobras reached R$9,214 million in the first quarter of 2012, a  16% decrease compared to R$10,985 million in the first quarter of 2011, due to the decreased net income before financial results and income taxes and the lower financial income (expenses), net.

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⁷  Fore more details, see appendix 2.

⁸  See Other Operating Income (Expenses) by Segment on page 22.

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.

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

EXPLORATION & PRODUCTION

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(*)  Not revised.

⁹  Does not include LNG. Includes reinjected gas.

Lifiting Costs – Brazil^(*)

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

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

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^(*) Not revised.

¹⁰ Includes crude oil exports volumes of Refining, Transportation and Marketing and Exploration & Production segments.

¹¹ From the first quarter of 2012 on, retroactively to 2011 for comparison purposes, it has been considered only the delivered volumes to third parties.

10

BIOFUEL 

DISTRIBUTION

INTERNATIONAL 

Our domestic sales volumes increased 10% in the first quarter of 2012 compared to the first quarter of 2011, primarily due to:

·         Diesel (increase of 9%) – The increase in diesel sales was primarily due to growth in the Brazilian economy and to increased activity in the agricultural sector;

·         Gasoline (increase of 24%) – The increase in gasoline sales volumes was due to competitive gasoline prices compared to ethanol prices, to an increase in the fleet of vehicles and to the reduction of the hydrated ethanol contents on Type C gasoline (from 25% to 20%) from October 2011 on;

·         Fuel oil (decrease of 11%) – The decrease in fuel oil sales was due to a partial transition to natural gas at thermoelectric power plants and in the industrial sector;

·         Natural gas (increase of 14%) – The increase in natural gas sales was due to higher industrial activity and to the growth in the Brazilian economy.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents

On March 31, 2012, we had cash and cash equivalents of R$39,904 million, a 12% increase compared to R$35,747 million at December 31, 2011. 

Net cash provided by operating activities amounted R$15,086 million in the first quarter of 2012, primarily due to net income of the period.

Cash provided by proceeds from borrowings (R$14,514 million) plus operating activities (R$15,086 million) were higher than our capital expenditures, repayment of debts and payment of dividends, besides the effect of exchange variation on cash and cash equivalents (R$25,443 million), providing a cash and cash equivalents increase of R$4,157 million in the first quarter of 2012.

Our adjusted cash and cash equivalents¹⁶ reached R$57,894 million on March 31, 2012, which includes government securities with maturity of more than 90 days of R$17,990 million, 7% higher compared to R$16,785 million on December 31, 2011.

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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

In line with its strategic objectives, Petrobras operates through joint ventures with other companies, in Brazil and abroad, as a concessionaire of oil and gas exploration, development and production rights.

Currently the Company is a member of 98 consortiums in Brazil, of which it operates 69. Petrobras is a member of 146 partnerships abroad, of which it operates 90.

In the first quarter of 2012, we invested an amount of R$18,020 million, which were primarily directed toward increasing production, modernizing and expanding our refineries, integration and expansion of our pipeline transportation and distribution systems.

Consolidated debt

The net debt of the Petrobras System in Reais increased by 3% over December 31, 2011, due to the raising of long-term funding.

¹⁷ Includes Capital lease obligations (R$38 million on March 31, 2012 and R$82 million on December 31, 2011).

¹⁸ Includes Capital lease obligations (R$ 187 million on March 31, 2012 and R$183 million on December 31, 2011).

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 cash and cash equivalents/financial investments.