PBR.A Petroleo Brasileiro ADR

FIRST HALF OF 2015 RESULTS

Reviewed by independent auditors, stated in millions of U.S. dollars, prepared in accordance with International Financial Reporting Standards - IFRS issued by the International Accounting Standards Board - IASB.

Rio de Janeiro – August 6, 2015

Net income was US$ 2,033 million in the 1H-2015, 55% lower than in the 1H-2014.

Operating income was US$ 7,745 million in the 1H-2015, 8% higher than in the 1H-2014.

Adjusted EBITDA was US$ 13,951 million in the 1H-2015, 4% higher than in the 1H-2014.

Net income was US$ 2,033 million in the 1H-2015, 55% lower than in the 1H-2014 due to higher net finance expenses and to the recognition of tax expenses with respect to the tax on financial operations (Imposto sobre Operações Financeiras - IOF), partially offset by a higher operating income (8%), resulting from higher margins in sales of oil products in the domestic market and increased crude oil export volumes driven by a 9% increase in domestic crude oil production, despite the decrease in domestic demand for oil products.

Key events in the 1H-2015:

·       Higher domestic crude oil and NGL production (9%, 183 thousand barrels/day);

·       Higher crude oil export volumes (107%, 178 thousand barrels/day);

·       Lower domestic demand for oil products (7%, 168 thousand barrels/day);

·       Lower import and production taxes costs;

·       Reversal of an allowance for impairment of receivables from companies in the northern Brazil isolated electricity system in March 2015 (US$ 452 million);

·       Higher net finance expense, amounting to US$ 3,932 million, mainly due to foreign exchange variation losses and to higher interest expense, attributable to an increase in the Company’s debt and a decrease in the level of capitalized borrowing costs; and

·       Brazilian income taxes on income of companies incorporated abroad (US$ 357 million).

Key events in the 2Q-2015:

·       Lower domestic crude oil and NGL production (2%, 38 thousand barrels/day);

·       Higher crude oil export volumes (44%, 124 thousand barrels/day);

·       Domestic oil product production increased (7%, 134 thousand barrels/day) and feedstock processed was higher (6%, 109 thousand barrels/day), maintaining an 86% share of domestic oil used for feedstock processing;

·       The Company received US$ 84 million related to insurance proceeds with respect to an incident in Chinook field (U.S.) in 2011;

·       The Company received US$ 51 million related to amounts recovered by the Brazilian Public Prosecutor’s Office in the context of the “Lava Jato” (Car Wash) Investigation;

·       The Company recognized tax expenses of US$ 1,280 million (including interest paid and after taxes) with respect to the tax on financial operations (Imposto sobre Operações Financeiras - IOF); and

·       Impairment losses of US$ 418 million were recognized with respect to Gas & Power, Refining, Transportation and Marketing and Exploration and Production assets, attributable to projects removed from the 2015-19 Business and Management Plan investment portfolio.

FINANCIAL AND OPERATING HIGHLIGHTS

Main Items and Consolidated Economic Indicators

FINANCIAL AND OPERATING HIGHLIGHTS

RESULTS OF OPERATIONS - 1H-2015 compared to the 1H-2014:

Virtually all revenues and expenses of our Brazilian operations are denominated and payable in Brazilian Reais. When the Brazilian Real depreciates relative to the U.S. dollar, as it did during the first half of 2015 (a 29% depreciation), revenues and expenses decrease when translated into U.S. dollars. Nevertheless, the depreciation of the Brazilian Real against the U.S. dollar affects the line items discussed below in different ways.

Gross Profit

Gross profit decreased by 2% (US$ 399 million) in the 1H-2015 compared to the 1H-2014, mainly due to:

Ø  A 27% decrease in sales revenues (US$ 51,988 million in the 1H-2015 compared to US$ 71,404 million in the 1H-2014), resulting from:

·          Lower crude oil and oil product export prices and a decrease in the average price of oil products sold in the domestic market, resulting from a decrease in international crude oil and oil product prices (Brent decreased by 47%). Higher diesel and gasoline prices, following a price increase in November 2014, partially offset those effects; and

·          Decreased domestic oil product demand (7%), mainly diesel (6%), gasoline (9%) and naphtha (14%), reflecting lower economic activity in Brazil.

Those effects were partially offset by a higher crude oil export volume (107%) due to an increase in domestic crude oil production and lower feedstock processed by our domestic refineries.

Sales revenues were 6% lower when expressed in Brazilian Reais. Foreign currency translation effects (depreciation of the Brazilian Real against the U.S. dollar) reduced sales revenues when expressed in U.S. dollars.

Ø  A 35% decrease in cost of sales (US$ 35,841 million in the 1H-2015 compared to US$ 54,858 million in the 1H-2014), due to:

·          Lower crude oil and oil product import costs, as well as lower production taxes attributable to a decrease in Brent prices, partially offset by higher crude oil production costs (in Brazilian Reais); and

·          Decreased domestic oil product sales volumes, lower share of crude oil imports on feedstock processing and a lower share of oil product imports in the sales mix.

Cost of sales was 16% lower when expressed in Brazilian Reais. Foreign currency translation effects (depreciation of the Brazilian Real against the U.S. dollar) reduced cost of sales expressed in U.S. dollars.

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

Net income before finance expense, share of earnings in equity-accounted investments, profit sharing and income taxes was US$ 7,745 million in the 1H-2015, US$ 573 million higher compared to US$ 7,172 million in the 1H-2014 (an 8% increase), resulting from:

·            The impact, in the 1H-2014, of the Company’s Voluntary Separation Incentive Plan - PIDV (US$ 1,005 million);

·            Reversal of an allowance for impairment of trade receivables from companies in the northern Brazil isolated electricity system in March 2015 (US$ 452 million);

·            Lower write-offs of dry and/or subcommercial wells (US$ 562 million); and

·            Receipt by the Company of US$ 51 million related to amounts recovered by the Brazilian Public Prosecutor’s Office in the context of the “Lava Jato” (Car Wash) Investigation.

Those effects were partially offset by:

·            A lower gross profit;

·            US$ 1,000 million tax expenses, with respect to the tax on financial operations (Imposto sobre Operações Financeiras - IOF) applicable to intercompany loans made by Petrobras to foreign subsidiaries, as set out in note 20.1 to the Company’s interim financial statements for the 2Q-2015;

·          Impairment losses of US$ 419 million were recognized with respect to Gas & Power, Refining, Transportation and Marketing and Exploration and Production assets, attributable to projects removed from the 2015-19 Business and Management Plan investment portfolio;

·          Higher pension and medical benefits expenses (retirees) attributable to the Company’s interim valuation review of its pension and medical benefits carried out in 2014 (US$ 157 million); and

·            Lower gains on disposal of assets, net of write-offs of assets (US$ 256 million).

Net finance expense

Net finance expense was US$ 3,932 million in the 1H-2015, US$ 3,437 million higher than in the 1H-2014 (US$ 495 million), resulting from:

·            Foreign exchange variation losses (US$ 1,773 million), mainly due to the impact of a 16.8% depreciation of the Brazilian Real against the U.S. dollar on the Company’s net debt (compared to a 6.0% appreciation in the 1H-2014), partially offset by our cash flow hedge; and

·            Higher interest expenses due to: i) an increase in the Company’s debt; ii) a decrease in the level of capitalized borrowing costs, attributable to a lower balance of assets under construction (US$ 963 million), reflecting the relevant projects concluded during 2014 and the write-offs and impairment losses recognized in December 2014; and iii) the recognition of interest expenses with respect to the tax on financial operations (Imposto sobre Operações Financeiras - IOF) applicable to intercompany loans made by Petrobras to foreign subsidiaries (US$ 423 million).

Those effects were partially offset by a foreign exchange variation gain due to the impact of an 8.2% appreciation of the U.S. dollar against the Euro on the Company’s debt in Euro (compared to a 0.6% appreciation in the 1H-2014).

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras was US$ 2,033 million in the 1H-2015, compared to US$ 4,505 million in the 1H-2014. This 55% decrease (US$ 2,472 million) results from a lower gross profit, higher net finance expense, tax expenses, with respect to the tax on financial operations (IOF) and an increase in income taxes due to the US$ 357 million impact of Brazilian income taxes on income of companies incorporated abroad (as set out in note 20.3.1 to the Company’s interim financial statements for the 2Q-2015).

FINANCIAL AND OPERATING HIGHLIGHTS

NET INCOME BY BUSINESS SEGMENT

Petrobras is an integrated energy company and most of the crude oil and natural gas production from the Exploration & Production segment is transferred to other business segments of the Company. Our results by business segment include transactions carried out with third parties, transactions between companies of Petrobras’s  Group and transfers between Petrobras’s business segments that are calculated using internal transfer prices defined through methodologies based on market parameters.

EXPLORATION & PRODUCTION

Net income was US$ 2,897 million in Jan-Jun/2015, a 69% decrease when compared to Jan-Jun/2014 (US$ 9,346 million), mainly due to a decrease in crude oil sales/transfer prices attributable to a 47% decrease in international crude oil prices, partially offset by an increase in crude oil production, a decrease in production taxes, lower write-offs of dry and/or subcommercial wells and by the negative impact of the Company’s Voluntary Separation Incentive Plan (PIDV) in 2014 (which was not recurrent in 1H-2015).

The spread between the average domestic oil price (sale/transfer) and the average Brent price decreased from US$10.40/bbl in Jan-Jun/2014 to U.S.$ 10.17/bbl in Jan-Jun/2015.

Crude oil and NGL production increased by 9% in the 1H-2015 compared to the 1H-2014 due to the production start-up of FPSOs Cidade de Mangaratiba (Iracema Sul area), Cidade de Ilhabela (Sapinhoá) and P-61 (Papa-Terra), along with the ramp-up of P-55 and P-62 (both in Roncador field), P-58 (Parque das Baleias), and of FPSOs Cidade de Paraty (Lula NE) and Cidade de São Paulo (Sapinhoá). This increase was partially offset by a natural decline of post-salt layer producing fields.

The 15% increase in natural gas production is attributable to the production start-up of FPSOs Cidade de Mangaratiba (Iracema Sul area), Cidade de Ilhabela (Sapinhoá) and P-61 (Papa-Terra) and to the higher productivity of P-55, P-62 (both in Roncador), P-58 (Parque das Baleias) and Mexilhão platforms, as well as FPSOs Cidade de Paraty (Lula NE), Cidade de São Paulo (Sapinhoá), Cidade de Santos (Uruguá-Tambaú) and Cidade de Angra dos Reis (Lula). This increase was partially offset by the natural decline of post-salt layer fields.

FINANCIAL AND OPERATING HIGHLIGHTS

 Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes was 10% lower in Jan-Jun/2015 compared to Jan-Jun/2014, due to an increase in crude oil production, partially offset by higher well intervention expenses and higher engineering and subsea maintenance costs in the Campos and Espírito Santo basins, along with the production start-up of the FPSO Cidade de Ilhabela (Sapinhoá), which has higher costs per unit produced during the start-up period.

Lifting Cost - Including production taxes

Lifting cost including production taxes was 36% lower in Jan-Jun/2015 compared to Jan-Jun/2014, mainly resulting from a decrease in production taxes due to lower average reference price for domestic crude oil in U.S. dollars (a 51% decrease, attributable to lower international crude oil prices).

FINANCIAL AND OPERATING HIGHLIGHTS

 REFINING, TRANSPORTATION AND MARKETING

The US$ 3,988 million net income in Jan-Jun/2015 compared to a US$ 3,776 million loss in Jan-Jun/2014 is attributable to a decrease in crude oil acquisition/transfer costs resulting from lower international crude oil prices, to diesel (5%) and gasoline (3%) price increases in November 2014, to a lower share of crude oil imports on feedstock processing and to a lower share of oil product imports in our sales mix.

Crude oil exports were higher and crude oil imports were lower due to an increase in crude oil production and a decrease in feedstock processed in the Company’s domestic refineries.

Oil product imports decreased, resulting from lower domestic demand.

Oil product exports decreased due to a decrease in fuel oil production.

FINANCIAL AND OPERATING HIGHLIGHTS

Daily feedstock processed was 5% lower, due to a scheduled stoppage in the distillation unit of Landulpho Alves Refinery (RLAM), partially offset by the production start-up of RNEST in November 2014.

Refining cost, in US$/barrel, decreased by 4% in Jan-Jun 2015 when compared to Jan-Jun 2014. Excluding foreign currency translation effects, refining cost, in R$/barrel, increased by 24%, mainly due to higher employee compensation costs attributable to the 2014 Collective Bargaining Agreement and to a decrease in feedstock processed due to a scheduled stoppage in RLAM in the 1Q-2015.

FINANCIAL AND OPERATING HIGHLIGHTS

GAS & POWER

Net income was US$ 400 million in Jan-Jun/2015, a 25% decrease when compared to Jan-Jun/2014 (US$ 533 million), due to: i) a decrease in electricity sales margins due to a 55% decrease in electricity spot prices; ii) an impairment loss recognized in a Nitrogen Fertilizers Plant (Unidade de Fertilizantes Nitrogenados V  – UFN V); iii) the recognition of tax expense related to deferred VAT on natural gas purchases (US$ 180 million); iv) a reversal of VAT credits from natural gas transportation activities in the State of Amazonas (US$ 116 million); and v) a gain on disposal of the Company’s interest in Brasil PCH S/A in 2014 (US$ 274 million), which was not recurrent in 2015.

Those factors were partially offset by: i) an increase in natural gas sales margins driven by higher natural gas sales prices and lower LNG and natural gas import costs; ii) an increase in natural gas sales volumes; and iii) reversal of an allowance for impairment of receivables from companies in the northern Brazil isolated electricity system.

Electricity sales volumes to the Brazilian free contracting market (Ambiente de Contratação Livre – ACL) were 25% lower, resulting from the transfer of a portion of our available capacity (1,049 average MW) to the Brazilian regulated market (Ambiente de Contratação Regulada – ACR).

Electricity generation was 15% higher due to an increase in the domestic demand for thermal power (coordinated and controlled by the Brazilian Electric System National Operator – Operador Nacional do Sistema ONS) and to an increase in the installed capacity of the Petrobras’s Thermal Power Plants Complex (due to the execution of a lease agreement for UTE Cuiabá thermal power plant and to the closure of the cycle of UTE Baixada Fluminense in January 2015).

Electricity prices decreased by 55% in the spot market resulting from changes in the spot market price regulation established by the Brazilian Electricity Agency (Agência Nacional de Energia Elétrica – ANEEL), which reduced the maximum spot price after December 27, 2014.

LNG imports decreased by 10% due to a higher domestic natural gas supply attributable to a 15% increase in domestic natural gas production.

FINANCIAL AND OPERATING HIGHLIGHTS

DISTRIBUTION

Net income was US$ 253 million in Jan-Jun/2015, a 39% decrease when compared to Jan-Jun/2014 (US$ 417 million), due to lower average trading margins (6.9%), and to a decrease in domestic demand for ethanol and gasoline.

Market share decreased mainly due to the expansion of the hydrated ethanol market (a 38% increase) in which Petrobras Distribuidora (BR) has a lower market share and also due to an increase in gasoline imports made by competitors in the 1H-2015.

FINANCIAL AND OPERATING HIGHLIGHTS

INTERNATIONAL

As a result of the creation of the position of Chief Governance, Risk and Compliance Officer, which replaced the position of Chief International Officer in March 2015, the Company has recently approved adjustments to the structure of other business segments to allocate its international activities to those other segments. Considering the necessary steps to integrate the management of those activities, the Company is still presenting the results of international activities separately.

Net income was lower in the 1H-2015 when compared to the 1H-2014 due to a decrease in international crude oil prices, which reduced both the gross margin and the earnings from the Company’s equity-accounted joint-venture in Africa. The decrease in E&P crude oil sales volumes attributable to the disposal of onshore assets in Colombia and of the Company’s investment in Petrobras Energia Peru S/A in 2014 also affected net income. These effects were partially offset by a gain on the disposal of fields in the Austral Basin in Argentina in 2015.

Consolidated international crude oil and NGL production decreased by 21%, due to the disposal of onshore areas in Peru in November 2014, in Colombia in April 2014 and in the Austral Basin in Argentina in March 2015. These effects were partially offset by an increase in production due to the start-up of Saint Malo fields in December 2014 and Lucius in January 2015 in the United States.

Natural gas international production decreased by 5%, mainly due to the disposal of onshore assets in Peru and of the Company’s investment in the Austral Basin in Argentina. These effects were partially offset by the production start-up of Hadrian South field in the United States in the end of March 2015. 

FINANCIAL AND OPERATING HIGHLIGHTS

International lifting cost was 5% lower, mainly in the United States, due to the production start-up of Saint Malo, Lucius and Hadrian South fields that have lower-than-average lifting costs, and due to the disposal of onshore assets in Peru and Colombia, which had higher-than-average lifting costs.

International total feedstock processed was 24% lower due to a decrease in oil product production and lower capacity utilization, mainly in the United States, due to a maintenance scheduled stoppage in the Pasadena Refinery distillation unit from the beginning of March 2015 to mid-April 2015, and in Japan due to the interruption of feedstock processing at the Okinawa Refinery since April 2015.

International refining cost per unit was 8% higher, mainly due to higher employee compensation costs in Argentina.

BIOFUEL

Biofuel losses were 85% higher in Jan-Jun/2015, when compared to Jan-Jun/2014, due to impairment losses in biofuel investees, attributable to changes in the Company’s 2015-2019 Business and Management Plan. Losses in ethanol trading due to a decrease in selling prices also increased biofuel losses.

FINANCIAL AND OPERATING HIGHLIGHTS

Sales Volumes – (Mbbl/d) ^(*)

Our domestic sales volumes decreased by 5%, primarily due to:

·       Diesel (a 6% decrease): i) lower consumption by infrastructure construction projects in Brazil; and ii) a higher percentage of mandatory biodiesel content requirement in diesel (diesel/biodiesel mix). These effects were partially offset by: i) an increase in the Brazilian diesel-moved light vehicle fleet (vans, pick-ups and SUVs); and ii) higher thermoelectric consumption by thermoelectric plants of the Brazilian Integrated Electricity System;

·       Gasoline (a 9% decrease): i) an increase in the anhydrous ethanol content requirement for Type C gasoline (from 25% to 27%); ii) a decrease in the automotive gasoline-moved fleet; and iii) a higher share of gasoline sales from other market players;

·       Naphtha (a 14% decrease): due to lower demand by domestic customers, mainly Braskem; and

·       Natural gas (a 2% increase):  due to a higher demand in the non-thermal sector.

  ^{(*) [22] [23]}

FINANCIAL AND OPERATING HIGHLIGHTS

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows – Summary²⁴

As of June 30, 2015, the balance of cash and cash equivalents increased by 57% when compared to the balance as of December 31, 2014 and the balance of adjusted cash and cash equivalents ²⁵  increased by 14%. Our principal uses of funds in the 1H-2015 were for capital expenditures, interest payments and repayment of long-term financing. We met these requirements with cash provided by operating activities of US$ 13,189 million and with proceeds from long-term financing of US$ 12,285 million.

Net cash provided by operating activities increased by 27% in Jan-Jun/2015 when compared to Jan-Jun/2014, mainly due to higher diesel and gasoline prices, increased crude oil export volumes, lower production taxes and decreased crude oil and oil product imports costs (attributable to a decrease in Brent prices and in international oil product prices), along with a lower share of crude oil imports on feedstock processing and a lower share of oil product imports in the oil product sales mix, resulting mainly from a decrease in the economic activity in Brazil (which reduced sales volumes).

Capital expenditures and investments in operating segments were 32% lower in Jan-Jun/2015 compared to Jan-Jun/2014, mainly due to a 69% decrease in capital expenditures in our Refining, Transportation and Marketing (RTM) segment. The US$ 5,807 million received in marketable securities relate to proceeds from the maturity of financial investments with maturities longer than three months, most of which were invested in other financial investments, with maturities of less than three months (classified as cash and cash equivalents).

Free cash flow was positive in Jan-Jun 2015 (US$ 7,449 million) compared to a negative free cash flow in Jan-Jun 2014 (US$ 5,736 million).

The Company raised long-term financing amounting to US$ 10,981 million in the 2Q-2015, mainly through financing agreements totaling US$ 5 billion with the Chinese Development Bank (CDB), US$ 2 billion raised through the issuance of Global Notes maturing in 2115, and also through bilateral credit agreements with Brazilian banks. The average maturity of outstanding debt was 7.42 years as of June 30, 2015.

Repayments of interest and principal were US$ 9,738 million in Jan-Jun/2015, 26% higher than US$ 7,699 million in Jan-Jun/2014 and flat in the 2Q-2015 when compared to the 1Q-2015.

The 2015-2019 Business and Management Plan (Plano de Negócios e Gestão) projects deleverage targets of 35% net debt to net debt plus shareholders’ equity ratio and a decrease on net debt to Adjusted EBITDA ratio to 2.5 times by 2020, and also projects raising US$ 57.7 billion through divesting efforts, businesses restructurings and demobilization of assets betweeen 2015 and 2018.

FINANCIAL AND OPERATING HIGHLIGHTS

Capital expenditures and investments

Pursuant to the Company’s strategic objectives, it operates through joint ventures in Brazil and abroad, as a concessionaire of oil and gas exploration, development and production rights.

The Company invested a total of US$ 12,201 million in the 1H-2015, primarily aiming at increasing crude oil and natural gas production.

FINANCIAL AND OPERATING HIGHLIGHTS

Consolidated debt

As of June 30, 2015, net debt in U.S. dollars was 2% lower when compared to December 31, 2014.

³¹ Beginning in 2014, the amount of inventory write-downs to net realizable value (market value) was reclassified from Other  Income and Expenses to Cost of Sales.

16

FINANCIAL AND OPERATING HIGHLIGHTS

Statement of Financial Position – Consolidated

FINANCIAL AND OPERATING HIGHLIGHTS

Statement of Cash Flows – Consolidated