Consolidated net income attributable to the shareholders of Petrobras reached R$ 7,747 million in the 4Q-2012 and R$21,182 million in the year ended December 31, 2012. The Adjusted EBITDA reached R$ 11,944 million in the 4Q-2012 and R$53,439 million in the year ended December 31, 2012, respectively.

Highlights

The Company reported 4Q-2012 net income of R$ 7,747 million and the following highlights:

·         Total proved reserves reached 16.44 billion barrels of oil equivalent (BOE) according to SPE/ANP criteria. In Brazil, the Reserves-to-Production ratio (R/P) was 19.3 years and the reserve replacement ratio was higher than 100% for the twenty-first consecutive year (103%).

·         Crude oil production increased, mainly reflecting the production startup of the Baleia Azul pre-salt field, in the Campos Basin, in September 2012 and the improved operational efficiency of this basin. 

·         Higher gasoline and natural gas domestic sales volumes, mainly met by a higher share of imports.

·         Gains on disposal of National Treasury Notes – B Series (NTN-B) helped to increase the finance income.

·         The amount of R$ 8,876 million relating to dividends proposed comprise interest on capital in the amount of   R$0.47 per common share and R$0.96 per preferred share, of which R$2,609 million were paid in advance during 2012. Interest on capital is a form of dividend distribution which is deductible for tax purposes in Brazil. An amount of R$2,131 million was recognized in the fourth quarter relating to tax benefits from interest on capital.

·         The cost reduction targets for the Operating Costs Optimization Program (PROCOP) were announced in December 2012, with potential savings of R$32 billion in the 2013-2016 period.   

Dear Shareholders and Investors,

Net income for 2012 was R$ 21 billion. This result, 36% below 2011 net income, was the result of growing oil product imports at higher prices, the depreciation of the Real, which impacts both our financial result and operating costs, and the increase in non-recurring expenses such the write-off of dry wells. Contributing to the lower income was the daily production of oil in Brazil, which although within our target range according to PNG 2012-2016, was 1,980 kbpd, 2% lower than 2011.

Our Brazilian refineries produced 1,997 kbpd of refined products, an increase of 5% over 2011. Improved operating efficiency (96% utilization factor) was responsible for the higher output, leading to record processing and reduced import needs. Natural gas consumption increased to 74.9 million m3/d, up 22% from the prior year, due to increased demand from thermoelectric power plants. Demand reached 89.4 million m3/d in the fourth quarter, as a result of record daily energy generation (5,883 MW on November 26), with  domestic gas deliveries (49.6 million m3/d on October 11), reducing the need to import LNG and Bolivian gas.

Despite the adversities faced by Petrobras in 2012, I would like to reiterate my strong belief in the Company’s medium and long-term prospects. This Administration fully recognizes the difficulties we face and is working ceaselessly to overcome them. Following an extensive and detailed diagnosis of our operating problems, we defined priorities and implemented short and medium-term structuring initiatives to improve our financial and economic results. The Operating Cost Optimization Program (Procop), the Program to Increase the Operating Efficiency of the Campos Basin (Proef), the Divestment Program (Prodesin) and the Logistics Infrastructure Optimization Program (Infralog) are examples of these initiatives, which have built-in goals and indicators established by various working teams and approved by the Executive Board, and are currently being intensely monitored by top Management.

The positive results are already measurable. The Proef has already begun to reverse the sharp drop in the efficiency of the Campos Basin Operational Unit, which fell to as low as 67% in April of 2012 when the program was implemented, but improved to 78% in December; the Procop established 515 cost reduction initiatives that will generate savings of R$32 billion between 2013 and 2016; and Infralog will rationalize the port, airport, pipeline and terminal project portfolios in order to meet expected oil and oil product output and market demand by 2020.

These new processes are now part of our daily routine and dialogue. I would like to highlight the Executive Board meetings, which are now held twice weekly to focus on the physical and financial monitoring of the principal projects in our investment plan. We have also implemented a number of important structural and organizational changes throughout the Company during 2012, enhancing efficiency, while at the same time promoting needed administrative changes. We are fully aware that only the constant pursuit of efficiency will allow us to achieve permanent gains that will improve the Company’s long term profitability, which is this Administration’s primary objective.

In 2013, we can only expect to maintain the current level of oil production. This is because of the concentration of scheduled maintenance stoppages of platforms that is needed in the first half of the year. Eventually offsetting the impact of the maintenance will be six new platforms to begin operations in the Sapinhoá, Baúna and Piracaba, Lula Nordeste, Papa-Terra and Roncador fields. These will contribute to growing production in the second half of the year, with the surge of output expected to continue into 2014. We will maintain the pace of our investments, which are estimated at R$97.6 billion in 2013, mostly allocated to oil and gas exploration and production in Brazil.

I am determined, together with the Executive Board and its leadership, to consolidate a process of improving management. Guided by transparency and pragmatism, we will continue to devote all our knowledge and efforts to achieving the goals of our Business and Management Plan, thereby generating more value for our shareholders and investors.

Maria das Graças Silva Foster

CEO

2

Main Items and Consolidated Economic Indicators

  ______________________

       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, profit-sharing 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

4Q-2012 x 3Q-2012 Results:

Gross Profit

Gross profit was 8% lower (R$ 1,524 million) compared to the 3Q-2012, mainly due to:

Ø Sales revenues of R$ 73,405 million were virtually flat compared to the 3Q-2012. The increased domestic demand, mainly of gasoline (7%), natural gas (20%) and fuel oil (38%) and the higher electricity sales prices were offset by lower crude oil exports and trading operations.

Ø Costs of sales of R$ 56,843 million was 2% higher compared to the 3Q-2012 due to the increase of the domestic sales volume (4%), mainly met by a higher share of gasoline and LNG imports, partially offset by lower trading volumes.

Net income before financial results, profit-sharing and income taxes

Net income before financial results, profit-sharing and income taxes decreased by 31% (R$ 2,744 million) compared to the 3Q-2012, mainly due to the lower gross profit, to higher write-offs of dry or sub-commercial wells in Brazil (R$ 524 million) and to the decrease in the operating profit of the international segment (R$1,335 million), mainly as a result of impairment charges, inventory write-downs to market value and higher crude oil exploration costs.

Net finance income (expense)

Net finance income was R$2,788 million, R$ 3,357 million higher compared to the 3Q-2012 due to the higher finance income, primarily as a result of gains on disposal of National Treasury Notes – B Series (NTN-B) and 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$  7,747 million, 39% higher compared to the 3Q-2012, reflecting tax benefits from deduction of interest on capital (R$ 2,131 million) and the higher net finance income, partially offset by lower net income before financial results, profit-sharing and income taxes.

RESULTS OF OPERATIONS

2012 x 2011 Results:

Gross Profit

Gross profit was 8% lower (R$ 6,330 million) compared to 2011, mainly due to:

Ø 15% increase in sales revenues (R$ 37,203 million), reflecting:

·    Rising export prices and higher oil product prices in the domestic market due to increased gasoline and diesel prices and to the impact of the depreciation of the Real (17% impact) on oil products that are adjusted to reflect international prices; 

·    An 8% increase in domestic sales volumes, mainly of gasoline (17% increase), diesel (6%), jet fuel (5%) and natural gas (17%), partially offset by lower crude oil exports volumes due to higher feedstock processed and to the lower crude oil production.

Ø 26% increase in the cost of sales (R$ 43,533 million), due to:

·    An 8% increase in domestic sales volumes of oil products, mainly met by imports;

·    Higher crude oil and oil products imports costs, as well as higher production taxes driven by the depreciation of the Real relative to the U.S. dollar; 

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

Net income before financial results, profit-sharing and income taxes

Net income before financial results, profit-sharing and income taxes reached R$ 32,397 million, a 29% decrease compared to 2011,                   due to the lower gross profit and to a 21% increase in operating expenses, mainly as a result of:

·    An increase in selling expenses (R$ 654 million), higher freight costs driven by the increase of sales volumes and higher employee compensation expenses arising from the 2011 and 2012 Collective Bargaining Agreements;

·    An increase in general and administrative expenses (R$ 1,195 million), reflecting higher employee compensation expenses arising from the 2011 and 2012 Collective Bargaining Agreements, larger workforce and increased third-party technical services;

·    Higher exploration costs (R$ 3,443 million), reflecting higher write-offs of dry or sub-commercial wells;

·    Higher other operating expenses (R$ 1,607 million), mainly due to increased losses on legal and administrative proceedings.

Net finance income (expense)

Net finance expense of R$3,723 million (compared with a net finance income of R$122 million in 2011), driven by the effect of the depreciation of the Real relative to the U.S. dollar on a higher net debt.

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached R$ 21,182 million in 2012, a 36% decrease compared with R$ 33,313 million in 2011, mainly reflecting the effect of the depreciation of the Real relative to the U.S. dollar on a higher net debt and lower net income before financial results, profit-sharing and income taxes.

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

(4Q-2012 x 3Q-2012): Net income increased due to a 4% increase of crude oil and NGL production, partially offset by higher 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 U.S.$7.81/bbl in the 3Q-2012 to U.S.$9.46/bbl in the 4Q-2012.

(2012 X 2011): Net income was higher due to increased domestic crude oil prices (sales/transfer), reflecting the depreciation of the Real and to lower impairment charges. These effects were partially offset by higher maintenance and repair costs related to wells, freight costs for oil platforms, depreciation of equipments and production taxes due to the start-up of new systems/wells, along with higher write-offs of dry or sub-commercial wells mainly drilled between 2009 and 2012 (at higher costs), especially in areas of new exploratory frontiers. 

The spread between the average domestic oil price (sale/transfer) and the average Brent price diminished from US$9.03/bbl in 2011 to US$6.98/bbl in 2012.

(4Q-2012 x 3Q-2012):   Crude oil and NGL production increased due to the operational start-up of FPSO Cidade de Anchieta, in Baleia Azul field in September (+57 mbd), to the increase in operational efficiency levels in Campos Basin driven by the Operational Efficiency Increase Program (Programa de Aumento da Eficiência Operacional – PROEF), to the interconnection of new wells in platforms P-53 (Marlim Leste field), P-51 and P-56 (Marlim Sul field) (+31 mbd), partially offset by the termination of the Iracema extended well test (EWT) and by the natural decline of production.

(2012 X 2011): Crude oil and NGL production decreased due to higher operational losses and to a stoppage in the Frade field, partially offset by the startup of new wells and by an increase in the operational efficiency levels in the Campos Basin.

Natural gas production increased due to the Uruguá, Mexilhão, Lula and Tambaú fields and to the higher efficiency in platforms in the Campos Basin.

___________

(*)  Not revised.

⁵  Does not include LNG. Includes gas reinjection.

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

(4Q-2012 x 3Q-2012):   Lifting cost excluding production taxes in U.S.$/barrel decreased by 10%. Excluding the impact of the depreciation of the Real it decreased by 9% due to the higher production and lower employee compensation costs, which included the payment of a non-recurring bonus in the 3Q-2012, related to the signing of the 2012 Collective Bargaining Agreement.

(2012 X 2011): Lifting cost excluding production taxes in U.S.$/barrel increased by 11%. Excluding the impact of the depreciation of the Real it increased by 22% due to higher maintenance and repair costs related to wells in the Marlim and Albacora fields, in connection with the Operational Efficiency Increase Program (Programa de Aumento da Eficiência Operacional – PROEF), as well as higher employee compensation costs arising from the 2011 and 2012 Collective Bargaining Agreements and higher workforce. 

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

(4Q-2012 x 3Q-2012):   Lifting cost, including production taxes, in U.S.$/barrel, decreased by 3%. Excluding the impact of the depreciation of the Real it decreased by 2% due to the lower lifting cost excluding production taxes, partially offset by the higher special participation charges on Marlim Leste.

(2012 X 2011): Lifting cost including production taxes, in U.S.$/barrel, increased by 4%. Excluding the impact of the depreciation of the Real dollar it increased by 9% due to the effects described above for the lifting cost excluding production taxes and also due to the higher special participation charges on Jubarte, Marlim Sul and Lula fields. These effects were partially offset by a 2% decrease on the average reference price of domestic oil in U.S. dollars, used to compute the production taxes.

__________________________

(*)  Not revised.

REFINING, TRANSPORTATION AND MARKETING

(4Q-2012 x 3Q-2012):   The net loss was flat due to the higher costs with imports of oil products, mainly gasoline, offset by lower selling expenses due to the decrease in the exports volumes and by a reversal of impairment charges on petrochemical assets.

(2012 X 2011): Net losses were higher due to the impact of the depreciation of the Real on crude oil costs (acquisition/transfer) and oil product costs (imports), and also due to a higher share of oil product imports over sales volumes. These effects were partially offset by higher oil product sales prices (both domestic and exports) and by a 5% increase in oil product outputs.

(4Q-2012 x 3Q-2012): Higher gasoline import volumes to meet the increased demand in the period.

Crude oil imports and exports decreased due to the higher share of domestic crude oil on the feedstock processed.

Crude oil exports were lower also due to part of the export volumes that remained in transit at the end of the period.

(2012 X 2011): Higher oil product import volumes, mainly gasoline and diesel, to meet the higher domestic demand.

Lower crude oil export volumes due to lower production and increased feedstock processed.

Oil product export volumes decreased due to the higher domestic demand.

________________________________________________

(*) Not revised.

6  Include crude oil exports volumes of Refining, Transportation and Marketing and Exploration & Production segments.

7   Starting from the second quarter of 2012, this number only includes volumes delivered to third parties. We have adjusted the 2011 numbers for comparison purposes.

(4Q-2012 x 3Q-2012): The daily feedstock processed was virtually flat due to the operational stability of the processing units.

(2012 X 2011): Daily feedstock processed increased by 4% due to the lower scheduled maintenance stoppages and to the improved operating performance of the units.

(4Q-2012 x 3Q-2012): Refining cost in U.S.$/barrel decreased by 18%. In R$/barrel it decreased by 15%, mainly as a result of lower employee compensation costs, which included the payment of a non-recurring bonus in the 3Q-2012, related to the signing of the 2012 Collective Bargaining Agreement, and due to a decrease in scheduled stoppages.

(2012 X 2011): Refining cost in U.S.$/barrel decreased by 17%. In R$/barrel it decreased by 3%, due to lower scheduled stoppages expenses and higher feedstock processed, partially offset by higher employee compensation costs arising from the 2011 and 2012 Collective Bargaining Agreements. 

________________________________________________

(*) Not revised.

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

GAS & POWER

(4Q-2012 x 3Q-2012): Net income increased due to higher electricity generation volumes and higher average prices of electricity, as a result of the lower hydroelectric availability, driven by lower rainfall levels in all Brazilian regions.

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

  
(2012 X 2011): Net income decreased due to lower margins on natural gas sales, driven by the impact of the appreciation of the U.S. dollar on LNG import costs and higher share of LNG imports over sales volumes, to meet the higher domestic thermoelectric demand, and also due to the positive impact of tax credits in 2011 (R$ 928 million).

These effects were partially offset by higher average electricity prices and sales volumes, due to the lower hydroelectric availability, driven by lower rainfall levels in all Brazilian regions.

(4Q-2012 x 3Q-2012): Electricity sales (contracts) were lower due to the lower proved capacity available in the 4Q-2012, as sales volumes were advanced on previous quarters.

LNG and in Bolivian gas imports were higher to meet the increase in the thermoelectric demand for electricity generation. The higher availability of domestic gas partially offset the need for imports.

(2012 X 2011): Electricity sales volumes increased due to the higher proved capacity available.

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

LNG import volumes increased to meet the domestic thermoelectric demand.

_____________________________________

 (*)  Not revised.                                                               

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

BIOFUEL

(4Q-2012 x 3Q-2012): Net loss decreased due to the higher results on biodiesel operations driven by the improved performance at the 27^th ANP auction, diversification of raw materials, higher operational efficiency and higher tax benefits. These effects were partially offset by the effect of the depreciation of the Real on the debt of associates from the ethanol sector and by the lower sales volume.

(2012 X 2011): Losses on biodiesel operations in 2012 were partially offset by changes in auction rules in the fourth quarter 2011. This effect was more than offset by a decrease in the share of profit of investments due to lower results from associates from the ethanol sector and by an increase in research and development expenses.

DISTRIBUTION

(4Q-2012 x 3Q-2012): Net income was higher due to a 14% increase in gross margins, driven by higher fuel oil and diesel sales for thermoelectric power plants of complement generation along with a 5% increase of sales volume in the period.

(2012 X 2011): Net income was higher due to a 16% increase in sales margins, driven by the impact of ethanol prices volatility in 2011, leading to inventory losses. Net income was higher also due to a 4% increase in sales volumes, as well as improved operational efficiency.

INTERNATIONAL 

(4Q-2012 x 3Q-2012): Net income was lower in the 4Q-2012 due to: i) lower sales volumes in the U.S. Pasadena refinery and in the Akpo field in Nigeria, driven by maintenance stoppages; ii) impairment losses in the Pasadena Refinery (R$464 million); iii) higher exploration costs (R$56 million) and write-offs of wells (R$133 million); iv) provision for impairment of trade receivables in Angola (R$110 million), and inventory write-downs (R$154 million).

(2012 X 2011): Net income was lower mainly due to impairment losses in the Pasadena refinery in the United States (R$ 464 million).

(4Q-2012 x 3Q-2012): Crude oil and NGL production decreased due to the maintenance scheduled stoppage in the Akpo field in Nigeria (-13 mbd), partially offset by the production startup in the Chinook field, in United States (+3 mbd).

Higher natural gas production due to the increased production in Bolivia (+6mboe) driven by the higher demand from Brazil, partially offset by the production stoppage in Austral Basin in Argentina (-2mboed).

(2012 X 2011): Crude oil and NGL production was virtually flat in the period. The agreements related to Upia, Caguan and Hobo in Colombia were terminated and there was a scheduled stoppage in the Akpo field (in November 2012) along with a production decrease related to the production-sharing agreement, both in Nigeria. These effects were offset by the production startup of the Cascade and Chinook fields and by Coulomb field in the United States, which resumed to normal operation.

Natural gas production remained flat in the period.

^{(*) [1]}

(4Q-2012 x 3Q-2012): Lifting cost increased due to the initial costs related to the production start-up in the Chinook field (United States); higher repair and maintenance costs due to repairs in storage tanks in Argentina; and due to lower production in Nigeria, driven by a scheduled stoppage.

                                                                   
(2012 X 2011): Lifting cost was higher due to initial production costs related to third-party services and well intervention in the Cascade field in February 2012 and in the Chinook field in September 2012, both in the United States, as well as higher maintenance and repair costs in mature fields in Argentina.

(4Q-2012 x 3Q-2012): Lower feedstock processed, output of oil products and nominal capacity utilization due to the maintenance stoppage of the atmospheric distillation unit in the U.S. Pasadena Refinery.

(2012 X 2011): Feedstock processed, output of oil products and utilization of nominal capacity were higher, due to higher operational efficiency in the Pasadena Refinery in the United States and due to higher feedstock processed in our Japanese refinery to meet the higher domestic demand. These effects were partially offset by the disposal of the San Lorenzo Refinery in Argentina in May 2011.  

(4Q-2012 x 3Q-2012): Refining cost decreased due to the lower feedstock processed in the United States, along with the higher maintenance expenses in our Japanese refinery.

(2012 X 2011): Refining cost was lower due to higher operational efficiency in the Pasadena Refinery in the United States.

   ^(*)

Sales Volumes (mbbl/d) ^(*)

Our domestic sales volumes were 8% higher compared to 2011, primarily due to the oil products set out below:

·         Gasoline (a 17% increase) – due to the increase in the flex-fuel automotive fleet, higher competitive advantage relative to ethanol in most Brazilian federal states and the reduction of the anhydrous ethanol content on Type C gasoline as from October 2011 (from 25% to 20%);

·         Diesel (a 6% increase) – due to the increase in the retail sector, along with higher thermoelectric consumption in the northern region of Brazil;

·         Natural gas (a 17% increase) – due to higher thermoelectric demand, driven by lower water reservoir levels at hydroelectric power plants.

·         Jet fuel (a 5% increase) – due to higher demand in the aviation sector.

___________________

(*) Not revised.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows Data – Summary ¹¹

At December 31, 2012, we had cash and cash equivalents of R$ 27,628 million compared with R$ 35,747 million at December 31, 2011. 

Net cash provided by operating activities in 2012 (R$ 54,145 million) decreased by 4% compared to 2011 (R$ 56,322 million), mainly driven by lower gross margins due to the impact of the depreciation of the Real on imports of crude oil and oil products and production taxes, as well as higher import volumes in 2012 (excluding depreciation, depletion and amortization from cost of sales).

Net cash used in investing activities increased from R$57,838  million in 2011 to R$74,939 million in 2012, mainly invested in Exploration & Production (R$41,933 million) and Refining, Transportation and Marketing (R$26,932 million) activities.

Cash provided by long-term financing (R$48,931 million) along with cash provided by operating activities (R$  54,145  million) sourced part of our capital expenditures needs, repayment of debts and payment of dividends, hence R$8,119 million from our cash and cash equivalents were used in 2012.

Our adjusted cash and cash equivalents¹² reached R$ 48,497  million at December 31, 2012 (which includes government securities with maturity of more than 90 days of R$ 20,869 million), 8% lower compared with R$ 52,532  million at December 31, 2011.