PBR.A Petroleo Brasileiro ADR

FIRST HALF OF 2016 RESULTS

Derived from interim financial information 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 11, 2016

Main financial highlights 2Q-2016 x 1Q-2016

·   Net income attributable to the shareholders of Petrobras of US$ 106 million, compared to net loss attributable to the shareholders of Petrobras of US$ 318 million in the 1Q-2016, as a result of:

§ A decrease of 22% in net finance expenses;

§ An 7% increase of crude oil and natural gas total production;

§ Higher revenues with an increase of 14% in crude oil and oil products exports and lower costs related to natural gas imports;

§ Expenses related to the new Voluntary Separation Incentive Plan (PIDV); and

§ Impairment losses related to Comperj assets.

·   The higher cash provided by operating activities and the decrease of capital expenditures and investments resulted in a positive free cash flow* for the fifth consecutive quarter of US$ 3,073 million in the 2Q-2016, 4 times higher when compared to 1Q-2016.

·   Adjusted EBITDA* of US$ 5,789 million in the 2Q-2016, a 7% increase compared to the 1Q-2016.

·   Gross indebtedness decreased 2% in U.S. dollars, from US$ 126,262 million on December 31, 2015 to US$ 123,922 million on June 30, 2016 (a US$ 2,340 million decrease). Net debt* increased 3% from US$ 100,425 million on December 31, 2015 to US$ 103,556 million on June 30, 2016.

·   The ratio between net debt and the Last Twelve Months (LTM) Adjusted EBITDA ^* increased from 4.41 as of December 31, 2015 to 5.18 as of June 30, 2016 and the leverage decreased from 60% to 55% in the same period.

·   The issuing of global notes totaling US$ 6.75 billion and the tender offer of US$ 6.3 billion generated the increase of average maturity of outstanding debt from 7.14 years as of December 31, 2015 to 7.30 years as of June 30, 2016.

Main operating highlights 2Q-2016 x 1Q-2016

·   Total crude oil and natural gas production was 2,804 thousand barrels of oil equivalent per day (boed), an increase of 7% compared to the 1Q-2016.

·   Domestic oil products output decreased 2% to 1,919 thousand barrels per day (bpd) and the domestic sales increased 3% to 2,109 thousand bpd.

·   Crude oil and oil products exports increased 14% to 515 thousand bpd and average Brent price increased 34% to US$/bbl 45.57.

·   Reduction of 55% in LNG imports due to higher domestic gas supply and lower thermoelectric demand.

www.petrobras.com.br/ir

Contacts:

PETRÓLEO BRASILEIRO S.A. – PETROBRAS

Investor Relations Department

E-mail: petroinvest@petrobras.com.br / acionistas@petrobras.com.br

Av. República do Chile, 65 – 1002  – 20031-912 – Rio de Janeiro, RJ

Phone: 55 (21) 3324- 1510 / 9947 I 0800-282-1540

This release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to risks and uncertainties. The forward-looking statements, which address the Company’s expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. There is no assurance that the expected events, trends or results will actually occur. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason.

 The Company’s actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of assumptions and factors. These factors include, but are not limited to, the following: (i) failure to comply with laws or regulations, including fraudulent activity, corruption, and bribery; (ii) the outcome of ongoing corruption investigations and any new facts or information that may arise in relation to the “Lava Jato Operation”; (iii) the effectiveness of the Company’s risk management policies and procedures, including operational risk; and (iv) litigation, such as class actions or proceedings brought by governmental and regulatory agencies.  A description of other factors can be found in the Company’s Annual Report on Form 20-F for the year ended December 31, 2015, and the Company’s other filings with the U.S. Securities and Exchange Commission.

1H-2016 x 1H-2015 Results* :

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 in the 1H-2016 (a 25% depreciation), revenues and expenses decrease when translated into U.S. dollars. 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 26% to US$ 11,875 million in the 1H-2016 when compared to the 1H-2015, mainly due to the effect of foreign exchange translation (depreciation of the Brazilian Real against the U.S. dollar). Excluding this effect, gross profit decreased by 9% when expressed in Brazilian Reais, due to lower sales revenues, as a result of a 7% reduction of domestic oil products sales, partially offset by higher diesel and gasoline margins. The decreased sales revenues was also due to lower crude oil and oil products export prices, to lower power generation, decreased electricity prices and the lower domestic natural gas sales volume.

In the 1H-2016, the Company experienced lower import costs and decreased production taxes in Brazil due to lower crude oil prices and decreased sales. However, higher depreciation expenses occurred as a result of a decrease in reserves estimates (mainly due to lower crude oil prices), which were partially offset by a lower carrying amount of assets that were impacted by impairment losses that were taken in 2015.

Operating income

Operating income was US$ 4,132 million in the 1H-2016, a 46% decrease when compared to the 1H-2015. Excluding the effect of foreign exchange translation, operating income decreased 32% in Brazilian Reais resulting from decreased gross profit, higher idleness expenses related to drilling rigs , higher expenses with legal proceedings, expenses associated with the new Voluntary Separation Incentive Plan and with the return of exploratory blocks. In addition, the 1H-2015 was impacted by the reversal of impairment charge related to trade receivables from companies in the electricity sector.

These effects were partially offset by lower tax expenses.

Net finance expense

Net finance expense was US$ 3,950 million in the 1H-2016, compared to a net finance expense of US$ 3,932 million in the 1H-2015, remaining relatively flat. Excluding the effect of foreign exchange translation, net finance expense increased in Brazilian Reais due to higher interest expenses as a result of higher debt and the effect of the depreciation of Brazilian Real against the U.S. dollar.

Net income (loss) attributable to the shareholders of Petrobras

Net loss attributable to the shareholders of Petrobras of US$ 212 million in the 1H-2016, compared to a net income of US$ 2,033 million in the 1H-2015, mainly due to lower operating income and to the effect of foreign exchange variation over the debt of structured companies in U.S. dollars, registered in net income attributable to non-controlling interests.

Adjusted EBITDA and Free Cash Flow **

Adjusted EBITDA was US$ 11,183 million in the 1H-2016, a 20% decrease compared to the 1H-2015. The Adjusted EBITDA Margin reached 29% in the 1H-2016. The decrease of capital expenditures and investments resulted in a positive free cash flow of US$ 3,683 million in the 1H-2016. This result represents an important effort to deleverage the Company.

RESULT BY BUSINESS SEGMENT

EXPLORATION & PRODUCTION

Gross Profit

(1H-2016 x 1H-2015): The decrease in gross profit in the 1H-2016 was generated by decreased Brent prices and by lower crude oil and NGL production in Brazil and abroad. In addition, gross profit was impacted by higher depreciation costs, partially offset by lower production taxes.

Operating income

(1H-2016 x 1H-2015): The decrease in operating income was due to lower gross profit. Excluding the effect of foreign exchange translation (25% depreciation of the Brazilian Real against the U.S. dollar), operating expenses were higher as a result of increased idleness expenses related to drilling rigs, to the expenses related to legal proceedings, to the new Voluntary Separation Incentive Plan and to higher expenses mainly due to the return of exploratory blocks.

Operating Performance

Production

(1H-2016 x 1H-2015): Domestic crude oil and NGL production decreased by 3% mainly due to higher realization of scheduled stoppages, mainly in P-48, P-53, FPSO Cid. Paraty and  P-18 platforms.  However, there were start-up and ramp-up of new systems, mainly FPSO Cid. Itaguaí (Lula – Iracema Norte area), FPSO Cid. Maricá (Lula Alto) and P-58 (Parque das Baleias).

Natural gas production remained relatively flat because the scheduled stoppages mentioned above were mainly offset by increased gas production of P-58 (Parque das Baleias) and by the production start-up of FPSO Cid. Maricá (Lula Alto).

Crude oil and NGL production abroad decreased 12% mainly as a result of the sale/return of fields in Argentina, and of the scheduled stoppage of Akpo field in Nigeria.

Gas production abroad increased 11% due to the production ramp-up in the Hadrian South field in the United States.

Lifting Cost

(1H-2016 x 1H-2015): Lifting cost in U.S. dollar decreased due to lower expenses with well intervention and with engineering and submarine maintenance, in addition to the higher share of pre-salt production, which has a lower unit cost.

In addition, production taxes decreased as a result of lower crude oil price.

Lifting cost decreased abroad due to the sale of the Austral Basin fields in Argentina, with higher operating costs, and to higher production in the United States, with lower costs. 

^*

REFINING, TRANSPORTATION AND MARKETING

Gross Profit

(1H-2016 x 1H-2015): Gross profit remained flat in the period, mainly due to the effects of foreign translation (25% depreciation of the Brazilian Real against the U.S. dollar). Excluding these effects, gross profit increased due to a decrease in crude oil purchase/transfer costs, following lower Brent prices, the lower share of crude oil imports on feedstock processing and the decreased share of oil products imports in our sales mix. These effects were partially offset by lower crude oil exports and by lower economic activity in Brazil that decreased domestic oil products sales.

Operating Income

(1H-2016 x 1H-2015): Operating income remained relatively flat in the period, mainly due to the effects of foreign translation (25% depreciation of the Brazilian Real against the U.S. dollar). Excluding these effects, operating income increased in Brazilian Reais due to higher gross profit, partially offset by impairment of Comperj assets due to a reassessment of this project.

Operating Performance

Imports and Exports of Crude Oil and Oil Products

(1H-2016 x 1H-2015): Improved balance of crude oil exports (imports) net, due to lower imports, as a result of decreased volume processed and a higher share of domestic crude oil on feedstock processed. These effects were partially offset by decreased export volume available, following lower production.

The decreased deficit of oil products exports (imports), net was due to lower need of diesel import as a result of lower economic activity.

Refining Operations

(1H-2016 x 1H-2015): Daily feedstock processed was 5% lower, due to scheduled stoppages, mainly in distillation plants of REPLAN and REVAP, partially offset by higher production of RNEST, as a result of operating improvements made.

Refining Cost

(1H-2016 x 1H-2015): Refining cost, as measured in US$/barrel, decreased by 14%. As measured in R$/barrel, refining cost increased by 7% mainly reflecting higher employee compensation costs attributable to the 2015/2016 Collective Bargaining Agreement, along with a decrease in feedstock processed.

GAS & POWER

Gross Profit

(1H-2016 x 1H-2015): Gross profit decreased 15% in the 1H-2016 when compared to the 1H-2015, mainly due to the effects of foreign translation (25% depreciation of the Brazilian Real against the U.S. dollar). Excluding these effects, gross profit increased 5% in Brazilian Reais, due to lower acquisition costs, mainly because of the reduction of natural gas and LNG imports. This effect was partially offset by lower natural gas sales to the thermoelectric sector and by decreased electricity generation due to the improvement of hydrological conditions in Brazil.

Operating income

(1H-2016 x 1H-2015): Operating income decreased 11% in the 1H-2016 when compared to the 1H-2015, mainly due to the effect of foreign translation (25% depreciation of the Brazilian Real against the U.S. dollar). Excluding these effects, operating income increased 14% in Brazilian Reais due to higher gross profit and also to lower operating expenses. The 1H-2015 was mainly impacted by expenses from tax contingencies and impairment, partially offset by the reversal of impairment of trade receivables from companies in the electricity sector.

Operating Performance

Physical and Financial Indicators

(1H-2016 x 1H-2015): Electricity sales to the Brazilian free contracting market ( Ambiente de Contratação Livre – ACL ) were 5% lower, attributable to the termination of agreements.

Decreased electricity sales volumes to the Brazilian regulated market ( Ambiente de Contratação Regulada – ACR ) was due to the termination of agreement representing 205 average MW, which occurred at Electricity Auction of 1H-2015.

The decreased electricity generation and lower electricity prices in the spot market (PLD) were due to improved hydrological conditions.

LNG imports decreased by 56% and natural gas imports from Bolivia were 10% lower, reflecting a decrease in thermoelectric demand.

DISTRIBUTION

Gross Profit

(1H-2016 x 1H-2015): Gross profit decreased 29% in the 1H-2016 when compared to the 1H-2015. Excluding foreign translation effects (25% depreciation of the Brazilian Real against the U.S. dollar), gross profit decreased 11% in Brazilian Reais due to lower sales volumes in Brazil, caused by the lower economic activity which impacted industrial customers, in which the market share of BR Distribuidora is higher than its competitors. These effects were partially offset by improved results abroad, due to higher gross margin as a result of increased mix of sales products in Paraguay.

Operating income

(1H-2016 x 1H-2015): Operating income in Brazil decreased as a result of higher losses with tax contingencies, partially offset by improved result abroad.  

Operating Performance

Market Share - Brazil

(1H-2016 x 1H-2015): Decreased market share was the result of lower sales to the thermoelectric sector and lower economic activity that mainly impacted industrial customers, in which the share of BR Distribuidora is higher than its competitors. In addition, the lower market share is a result of a shift in our sales policy to prioritize higher margins instead of sales volumes.

As of June 30, 2016, the balance of cash and cash equivalents was US$ 19,609 million and the balance of adjusted cash and cash equivalents for the same period was US$ 20,366 million. Our principal uses of funds in the 1H-2016 were for repayment of long-term financing (and interest payments) and for capital expenditures. We partially met these requirements with cash provided by operating activities of US$ 10,679 million and with proceeds from long-term financing of US$ 9,100 million. The balance of adjusted cash and cash equivalents was negatively impacted in the 1H-2016 by foreign exchange rate variation applied to our foreign financial investments.

Net cash provided by operating activities of US$ 10,679 million was mainly generated by higher diesel and gasoline margins, lower production taxes in Brazil and lower crude oil, oil products and natural gas imports costs, along with a higher share of domestic crude oil on feedstock processing. These effects were partially offset by lower crude oil and oil product exports prices and decreased sales volume in Brazil due to lower economic activity.

Capital expenditures and investments in investees were US$ 6,996 million in the 1H-2016 (89% in E&P business segment), a 41% decrease when compared to the 1H-2015.

Free cash flow* was positive, amounting US$ 3,683 million in the 1H-2016, for the fifth consecutive quarter.

From January to June 2016, the Company issued global notes in international capital markets totaling US$ 6.75 billion, with maturities of 5 and 10 years, and the proceeds of those notes offerings were used to tender for US$ 6.3 billion of Petrobras’s existing global notes. In addition, the Company entered into a sale and leaseback operation with the Industrial and Commercial Bank of China (ICBC) in the amount of US$ 1 billion. The average maturity of outstanding debt was 7.30 years as of June 30, 2016 (7.14  years as of December 31, 2015). It is important to mention the issuing of US$ 3 billion for tender offer at the same amount in July 2016.

Repayments of interest and principal were US$ 19,159 million in the 1H-2016 and the nominal cash flow (cash view), including principal and interest payments, by maturity, is set out in US$ million as follows:

^*

Consolidated debt

As of June 30, 2016, the gross debt in U.S. dollars decreased 2% and the net debt in U.S. dollars was 3% higher when compared to December 31, 2015.

Current debt and non-current debt include finance lease obligations of US$ 25 million and US$ 98 million on June 30, 2016, respectively (US$ 19 million and US$ 78 million on December 31, 2015).

ADDITIONAL INFORMATION

1.      Reconciliation of Adjusted EBITDA

Adjusted EBITDA is not a measure defined in the International Financial Reporting Standards – IFRS. Our calculation may not be comparable to the calculation of Adjusted EBITDA by other companies and it should not be considered as a substitute for any measure calculated in accordance with IFRS. The Company reports its Adjusted EBITDA to give additional information about its profitability and must be considered in conjunction with other measures and indicators for a better understanding of the Company's financial performance. The Adjusted EBITDA is also a component of the Net debt / LTM adjusted EBITDA ratio, which is a metric included in the Company’s Business and Management Plan.

For interim financial periods, the Company calculates the last twelve months adjusted EBITDA (LTM Adjusted EBITDA), consistently with market best practices.

The decreased reclassification of foreign exchange variation expenses from the Shareholders’ Equity to the Statement of Income was mainly due to the fact that the 1Q-2016 was impacted by planned exports that were no longer expected to occur or did not occur, mainly due to the decrease in crude oil prices. Decreased planned export volumes were no longer expected to occur or did not occur in the 2Q-2016.

Additional hedging relationships may be revoked or additional reclassification adjustments from equity to the Statement of Income may occur as a result of changes in forecast export prices and export volumes following a review in the Company’s business plan. Based on a sensitivity analysis considering a US$ 10/barrel decrease in average Brent prices stress scenario, when compared to the Brent price projections in our most recent update of the 2015-2019 Business and Management Plan (Plano de Negócios e Gestão – PNG), a US$ 302 million reclassification adjustment from Shareholders’ Equity to the statement of income would occur.

The expected annual realization of the foreign exchange variation balance in shareholders’ equity, on June 30, 2016, is set out below: