FIRST QUARTER OF 2012      

RESULTS

Consolidated net income attributable to the shareholders of Petrobras reached U.S.$5,212 million in the first quarter of 2012. EBITDA in the first quarter of 2012 was U.S.$9,345 million, 2% lower compared to the first quarter of 2011.

Highlights

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.

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

² Gross margin equals sales revenues less cost of sales divided by sales revenues.

³ Operating margin equals net income before financial income (expenses), net, and income taxes divided by sales revenues.

⁴ Net margin equals net income divided by sales revenues.

⁵ EBITDA equals income before financial results, profit sharing, income taxes and depreciation, depletion and amortization. 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. 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 EBITDA to give additional information about our capacity to pay debt, carry out investments and cover working capital needs.  See Consolidated EBITDA Statement by Segment on page 21 for a reconciliation of our EBITDA.

⁶ Average exports and of the internal transfer prices from Exploration & Production to Refining, Transportation and Marketing.

⁷ As of September 2011, we have factored in natural gas realization prices.

RESULTS OF OPERATIONS FOR THE FIRST QUARTER OF 2012 COMPARED TO THE FIRST QUARTER OF 2011

Virtually all of the revenues and expenses for our Brazilian activities are denominated and payable in Reais. When the Real weakens relative to the U.S. dollar, as it did in the first quarter of 2012 with a depreciation of 5.7%, the effect is to generally decrease both revenues and expenses when expressed in U.S. dollars. However, the depreciation of the Real against the U.S. dollar affects the line items discussed below in different ways. The following comparison between our results of operations in the first quarter of 2012 and in the first quarter of 2011 was impacted by the decrease in the value of the Real against the U.S. dollar during that period.

Sales Revenues

Sales revenues increased 15% to U.S.$37,410 million in the first quarter of 2012 compared to U.S.$32,602 million in the first quarter of 2011. This increase was primarily attributable to:

Cost of Sales

Cost of sales in the first quarter of 2012 increased 26% to U.S.$25,959 million compared to U.S.$20,673 million in the first quarter of 2011. This increase was primarily attributable to:

Net income before financial results and income taxes

Net income before financial results and income taxes decreased 10% to U.S.$6,659 million in the first quarter of 2012 compared to U.S.$7,388 million in the first quarter of 2011, due to increases in operating expenses mainly as a result of:

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

Financial Income (Expenses), Net

Financial income (expenses), net decreased 79% to an income of U.S.$263 million in the first quarter of 2012 compared to an income of U.S.$1,229 million in the first quarter of 2011, reflecting:

Consolidated net income attributable to the shareholders of Petrobras

Consolidated net income attributable to the shareholders of Petrobras decreased 21% to U.S.$5,212 million in the first quarter of 2012 compared to U.S.$6,588 million in the first quarter of 2011, due mainly to the decreased net income before financial results and income taxes and the lower financial income (expenses), net, as explained above.

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 transfers between business segments are factored in. Inter-segment transactions are valued using internal transfer prices that are defined between business segments, using methodologies that are premised on market parameters.

We provide below the financial information from our different operating segments and related operating information.

EXPLORATION & PRODUCTION

(U.S.$ million)

The 26% increase in net income from E&P segment in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to higher average domestic oil prices and due to an increase in oil and NGL production, partially offset by increased expenses related to government participation charges, reflecting the international oil prices trend.

The spread between the average domestic oil sale/transfer price and the average Brent price narrowed from U.S.$ 10.93/bbl in the first quarter of 2011 to U.S.$ 6.93/bbl in the first quarter of 2012.

(1Q-2012 X 1Q-2011):  The increased production was due to the ramp-up production in platforms P-56 (Marlim Sul field), P-57 (Jubarte field), FPSO-Santos (Uruguá field) and FPSO-Angra dos Reis (Lula field), to the gas production in Mexilhão field, to the start-up of production of the new wells in Caratinga and Albacora fields and also to the extended well tests (EWT) of Sídon, Aruanã, Oliva, Iracema area and of the ESP-23 well, which were partially offset by the natural decline in crude oil and NGL production from mature fields and by the habitual campaign of scheduled stoppages on production systems started in March.

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(*) Not revised.

⁸Does not include LNG. Includes reinjected gas.

Lifting Costs - Excluding production taxes

Excluding the impact of the exchange variation effects, our unit lifting costs in Brazil, excluding production taxes (consisting of royalties, special government participation charges and rental of areas) increased by 19% in the first quarter of 2012 compared to the first quarter of 2011 due to higher operational costs generated by higher water production together with oil production, higher water injection, to the higher number of maintenances in production systems of Campos Basin and to the increased well interventions in Marlim, Albacora, Albacora Leste, Cherne and Marimbá fields, besides the salary increases arising out of the Collective Bargaining Agreement for 2011.

Lifting Costs - Including production taxes

Excluding the impact of the exchange variation effects, our unit lifting costs in Brazil, including production taxes, increased by 19% in the first quarter of 2012 compared to the first quarter of 2011, primarily attributable to the increase in the reference price for domestic oil, reflecting higher international oil prices.

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(*) Not revised.

REFINING, TRANSPORTATION AND MARKETING

(U.S.$ million)

The increase in net losses for our RTM segment in the first quarter of 2012 compared to the first quarter of 2011 was attributable to higher oil acquisition/transfer costs, where oil products are indexed to international prices, to a greater volume  of imported oil products  and the appreciation of U.S. dollar against the Real. These effects were partially offset by higher average price realization of exports and higher domestic prices.

Higher volumes of both diesel and gasoline were imported to meet higher demand.

Higher volumes of crude oil were exported as a result of production increase. 

Lower crude oil imports in the first quarter of 2012, compared to the same period of 2011, when the inventories were increased for maintenance of the logistic structure in Sao Paulo.

The daily feedstock processed increased 2% in the first quarter of 2012 compared to the first quarter of 2011 due to the lower scheduled stoppages at distillation plants.

Excluding the impact of the exchange variation effects, our refining costs in Brazil remained relatively constant in the first quarter of 2012 compared to the first quarter of 2011, because the lower expenses with scheduled stoppages were offset by operational repairs and by increased personnel expenses arising out of the Collective Bargaining Agreement for 2011.

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(*) Not revised.

  ⁹ Includes crude oil exports volumes of Refining, Transportation and Marketing and Exploration & Production segments.

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

GAS & POWER

(U.S.$ million)

The 28% increase in net income for our Gas & Power segment was mainly due to the increase in the average realization price of natural gas and higher sales volume, to an increase in power sales in the short-term market, to power generation for export and to the higher nitrogenous sales volume.

These effects were partially offset by higher natural gas import costs reflecting higher international prices and by the appreciation of the U.S. dollar against the Real.

The 100% increase in imports of LNG was pursued to meet thermoelectric demand in Southern Brazil.

The 14% increase in sales of electricity was attributable to the increased additional sales due to the higher reserve available.

The 12% increase in electricity output was attributable to a decision taken by the Operador Nacional do Sistema Elétrico (National Electricity System Operator – ONS) as a result of lower rainfall levels, as well as to exports in the first quarter of 2012.

The 65% increase in the settlement price of differences (price of power in the spot market) was due to the dry weather in Southern Brazil, reflecting lower water reservoir levels for this period.

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(*)Not revised.

¹¹ Weekly weighed prices per output level (light, medium and heavy), number of hour and submarket capacity.

BIOFUEL 

(U.S.$ million)

The changes in auction rules occurred in the last quarter of 2011 improved  the biofuel operating margins. However, this improvement was offset by the lower results from investments in the ethanol sector, due to the unfavorable sales prices and higher agricultural costs generated by climate effects that caused lower productivity of sugar cane plantation.

DISTRIBUTION 

(U.S.$ million)

The 7% decrease in net income of our Distribution segment in the first quarter of 2012 compared to the first quarter of 2011 was mainly due to increased costs related to commercial services with freight, technical support, and personnel expenses arising out of the Collective Bargaining Agreement for 2011. This decrease was partially offset by the 6% increase in sales volume of the first quarter of 2012 compared to first quarter of 2011.

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(*)Not revised.

¹² Based on Petrobras Distribuidora estimates.

INTERNATIONAL

(U.S.$ million)

The 12% increase in net income of our International segment in the first quarter of 2012 compared to the first quarter of 2011 was primarily attributable to the recovery of commodities prices in the international market.

International consolidated crude oil and NGL production decreased due to the lower participation in the Akpo Field in Nigeria, partially offset by the restarting of operations at the Coulomb field, the start-up of production of a new production well in the Cottonwood field, and production from the Cascade field, all of them in the United States.

Increased natural gas production in United States, due to the reasons mentioned above, and also in Argentina due to the start-up of new production wells in the Neuquén field and of the Estância Água Fresca  plant in the Austral basin.

The increase in our international lifting costs was primarily due to increased well interventions, maintenances and the higher costs of third-party services in Argentina, as well as the higher initial costs in Cascade field in the United States.

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(*)Not revised.

¹³ Some of the countries that comprise the international production, such as Nigeria and Angola, are operating under the production-sharing model, with the production taxes charged in crude oil barrels.

The decrease in the feedstock processed, in our international refinery output and in our installed capacity were generated by the sale of the San Lorenzo Refinery in Argentina, partially offset by the higher feedstock processed in Japan to meet higher demand after the earthquake that occurred in March 2011.

International refining costs decreased in the first quarter of 2012 compared to the first quarter of 2011 due to the lower maintenance and scheduled stoppages expenses in the Pasadena Refinery in the United States.

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(*)Not revised.

Sales Volumes  – (mbbl/d) (*)

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

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(*)Not revised.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents

On March 31, 2012, we had cash and cash equivalents of U.S.$21,900 million compared to U.S.$19,057 million at December 31, 2011. 

Net cash provided by operating activities amounted U.S.$8,535 million in the first quarter of 2012, primarily due to net income.

Cash provided by issuance of debt (U.S.$8,210 million) plus operating activities (U.S.$8,535 million) sourced our capital expenditures, repayment of debts and dividends, providing a net cash and cash equivalents increase of U.S.$2,843 million in the first quarter of 2012.

Our adjusted cash and cash equivalents¹⁴ reached U.S.$31,773 million on March 31, 2012, which includes government securities with maturity of more than 90 days of U.S.$9,873 million, 10% higher compared to U.S.$8,948 million on December 31, 2011

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¹⁴ 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

In line with our strategic objectives, we operate 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 U.S.$10,194 million, which was primarily directed toward increasing production, modernizing and expanding our refineries, and the integration and expansion of our pipeline transportation and distribution systems.

Consolidated debt

The net debt of Petrobras and its consolidated subsidiaries in U.S. dollars increased 6% on March 31, 2012 compared to December 31, 2011, due to the raising of long-term debt.

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¹⁵ Includes finance lease obligations (current debt: U.S.$21 million on March 31, 2012 and U.S.$44 million on December 31, 2011; long-term debt: U.S.$103 million on March 31, 2012 and U.S.$98 million on December 31, 2011).  

¹⁶ 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.

¹⁷ Total liabilities net of cash and cash equivalents/financial investments.

FINANCIAL STATEMENTS

Income Statement – Consolidated

Statement of Financial Position – Consolidated

Statement of Cash Flows Data – Consolidated