PBR.A Petroleo Brasileiro ADR

THIRD QUARTER 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 – November 12, 2015

Net income was US$ 971 million in Jan-Sep/2015, 59% lower than in Jan-Sep/2014. Loss of US$ 1,062 million in the 3Q-2015.

Operating income was US$ 9,382 million in Jan-Sep/2015, 80% higher than in Jan-Sep/2014.

Adjusted EBITDA was US$ 18,320 million in Jan-Sep/2015, 7% higher than in Jan-Sep/2014.

Net debt was US$ 101,273 million as of September 30, 2015, a 5% decrease when compared to December 31, 2014.

The average maturity of outstanding debt increased from 6.10 years as of December 31, 2014 to 7.49 years as of September 30, 2015.

Net income was US$ 971 million in Jan-Sep/2015, 59% lower when compared to US$ 2,355 million in Jan-Sep/2014, mainly attributable to higher finance expenses in the Jan-Sep/2015 period. The 80% increase in operating income was mainly a result of higher margins in oil product sales in the domestic market and increased crude oil export volumes driven by a 7% increase in domestic crude oil production, despite a decrease in domestic demand.

Key events in Jan-Sep/2015:

·       6% increase of crude oil and natural gas production (in Brazil and abroad);

·       Higher crude oil export volumes (60%, 132 thousand barrels/day);

·       Lower domestic demand for oil products (8%, 195 thousand barrels/day);

·       Lower import costs and production taxes; and

·       Net finance expense was US$ 7,158 million, a 676% increase when compared to Jan-Sep/2014 as a result of foreign exchange losses and higher interest expense, attributable to an increase in the Company’s debt and a decrease in the level of capitalized borrowing costs, attributable to a lower balance of assets under construction.

Key events in the 3Q-2015, when compared to the 2Q-2015:

·       1% increase of crude oil and natural gas production (in Brazil and abroad);

·       Increased domestic demand for oil products (1%, 32 thousand barrels/day);

·       Lower crude oil export volumes (10%, 40 thousand barrels/day); and

·       A US$ 1,257 million increase in net finance expense as a result of foreign exchange losses.

FINANCIAL AND OPERATING HIGHLIGHTS

Main Items and Consolidated Economic Indicators

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FINANCIAL AND OPERATING HIGHLIGHTS

RESULTS OF OPERATIONS - Jan-Sep/2015 compared to Jan-Sep/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 Jan-Sep/2015 (a 38% 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 decreased by 11% (US$ 2,689 million) in Jan-Sep/2015 compared to Jan-Sep/2014, mainly due to:

Ø  A 32% decrease in sales revenues (US$75,167 million in Jan-Sep/2015 compared to US$ 110,248 million in Jan-Sep/2014), resulting from:

·          Lower crude oil and oil product export prices and decreased domestic price of naphta, jet fuel and fuel oil;

·          Decreased domestic demand for oil products (8%), reflecting lower economic activity in Brazil;

·          Decreased oil product exports (12%);

·          Higher crude oil export volumes (60%) attributable to an increase in domestic crude oil production (7%) and to a decrease in feedstock processed by our domestic refineries (5%); and

·          Higher diesel and gasoline prices, following a price increase in November 2014.

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 38% decrease in cost of sales (US$ 52,325 million in Jan-Sep/2015 compared to US$ 84,717 million in Jan-Sep/2014), due to:

·          Lower crude oil and oil product import costs, as well as lower production taxes;

·          Decreased domestic demand for oil products;

·          Lower share of crude oil imports on feedstock processing and a lower share of oil product imports in the sales mix; and

·          Higher crude oil production costs.

Cost of sales was 15% lower when expressed in Brazilian Reais. Foreign currency translation effects (depreciation of the Brazilian Real against the U.S. dollar) reduced cost of sales when expressed in U.S. dollars.

Net income before finance expense, share of earnings in equity-accounted investments, profit sharing and income taxes was US$ 9,382 million in Jan-Sep/2015, US$ 4,177 million higher compared to US$ 5,205 million in Jan-Sep/2014 (an 80% increase), resulting from:

·          Non-recurring events that affected net income in Jan-Sep/2014, including:

o    (i) write-off of overpayments incorrectly capitalized (US$ 2,527 million);

o    (ii) allowance for impairment of trade receivables from companies in the isolated electricity sector (US$ 1,651 million);

o    (iii) write-off of capitalized costs with respect to Premium I and Premium II refineries (US$ 1,190 million); and

o    (iv) expenses related to our Voluntary Separation Incentive Plan - PIDV (US$ 1,040 million).

·          Translation effect: operating expenses, when translated into U.S. dollars, decreased in Jan-Sep/2015 when compared to Jan-Sep/2014 as a result of the depreciation of the Brazilian Real against the U.S. dollar;

·          Lower write-offs of dry and/or subcommercial wells (US$ 819 million);

·          Those effects were partially offset by higher tax expenses (US$ 1,892 million) mainly attributable to the Company’s decision to benefit from a tax amnesty program in 2015 (Programa de Parcelamento Especial de Débitos Tributários) – see note 20.2 to our 3Q-2015 Financial Statements;

·          A lower gross profit;

·          Higher legal proceedings expenses (US$ 819 million), mainly related to labour and tax claims and a non-recurring positive effect in Jan-Sep/2014 related to a legal proceeding with respect to recoverable taxes (PIS and COFINS overpaid on finance income);

·          Higher pension and medical benefits expenses (retirees) in 2015 attributable to an increase in the Company’s net actuarial liability as a result of a decrease in real interest rates, following the Company’s interim valuation review of its pension and medical benefits in 2014 (US$ 248 million); and

·          Impairment losses attributable to projects removed from the 2015-19 Business and Management Plan investment portfolio (US$ 419 million).

Net finance expense was US$ 7,158 million in Jan-Sep/2015, US$ 6,236 million higher than in Jan-Sep/2014 (US$ 922 million), resulting from:

·          Foreign exchange losses caused by the impact of a 49.6% depreciation of the Brazilian Real against the U.S. dollar on the Company’s net debt (compared to a 4.6% depreciation in Jan-Sep/2014), partially offset by our cash flow hedge;

·          Foreign exchange losses caused by the impact of a 37.4% depreciation of the Brazilian Real against the Euro on the Company’s net debt (compared to a 4.1% appreciation in Jan-Sep/2014); and

·          Higher interest expenses due to:

i) an increase in the Company’s debt;

ii) a decrease in the level of capitalized borrowing costs due to a lower balance of assets under construction, reflecting the relevant projects concluded during 2014 and the write-offs and impairment losses recognized in December 2014; and

iii) interest expenses on tax deficiency notices related to tax on financial operations (Imposto sobre Operações Financeiras - IOF) and withholding income tax.

Net income attributable to the shareholders of Petrobras was US$ 971 million in Jan-Sep/2015, compared to US$ 2,355 million in Jan-Sep/2014. This 59% decrease (US$ 1384 million) results mainly from:

·          Higher net finance expenses; and

·          A lower gross profit.

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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$ 3,532 million in Jan-Sep/2015, a 73% decrease when compared to Jan-Sep/2014 (US$ 12,989 million), attributable to a decrease in crude oil sales/transfer prices.

The increase in crude oil volume transferred and lower write-offs of dry and/or subcommercial wells partially offset these effects.

The Jan-Sep/2014 period was affected by the Company’s Voluntary Separation Incentive Plan (PIDV) and the write-off of overpayments incorrectly capitalized.

Crude oil and NGL production increased by 7% in Jan-Sep/2015 compared to Jan-Sep/2014 due to the start-ups of FPSOs Cidade de Mangaratiba (Iracema Sul area, Lula field) and Cidade de Ilhabela (Sapinhoá), Cidade de Itaguaí (Iracema Norte, Lula field) and P-61 (Papa-Terra), along with the continuing ramp-ups 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 the natural decline of production in fields.

The 12% increase in natural gas production is attributable to the production start-up of the units mentioned above and also to the higher productivity of Mexilhão platform and of FPSO Cidade de Santos (Uruguá-Tambaú), which were partially offset by the natural decline of production in fields.

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FINANCIAL AND OPERATING HIGHLIGHTS

 Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes was 16% lower in Jan-Sep/2015 compared to Jan-Sep/2014. Excluding foreign exchange variation effects, lifting cost excluding production taxes increased by 4% due to higher well intervention expenses and higher engineering and subsea maintenance costs in the Campos Basin, partially offset by an increase in crude oil production.

Lifting Cost - Including production taxes

Lifting cost including production taxes was 39% lower in Jan-Sep/2015 compared to Jan-Sep/2014, due to lower production taxes (royalties and special participation charges) attributable to a decrease in the average reference price for domestic crude oil in U.S. dollars (a 52% decrease) reflecting lower international crude oil prices and decreased lifting cost mentioned above.

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FINANCIAL AND OPERATING HIGHLIGHTS

 REFINING, TRANSPORTATION AND MARKETING

Earnings in Jan-Sep/2015 were a US$ 5,039 million gain, compared to a US$ 7,582 million loss in Jan-Sep/2014, attributable to a decrease in crude oil purchase/transfer costs, to a lower share of crude oil imports on feedstock processing, a lower share of oil product imports in our sales mix and diesel (5%) and gasoline (3%) price increases in November 2014.

The US$ 7,582 million loss in Jan-Sep/2014 reflects the non-recurring effect of write-off of overpayments incorrectly capitalized, the write-off of capitalized costs from Premium I and Premium II refineries and our 2014 Voluntary Separation Incentive Plan (PIDV).

Crude oil exports were higher due to increased production.

Lower crude oil imports reflect a lower share of crude oil imports in feedstock processing.

Oil product imports decreased as a result of a lower domestic demand.

Oil product exports were lower due to a decrease in feedstock processed.

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FINANCIAL AND OPERATING HIGHLIGHTS

Feedstock processed was 5% lower, reflecting a decrease in domestic demand, a scheduled stoppage in the distillation unit of Landulpho Alves Refinery (RLAM) and an unscheduled production suspension in REDUC, partially offset by the production start-up of RNEST in November 2014.

Refining cost decreased by 15% in Jan-Sep/2015 when compared to Jan-Sep/2014, mainly due to a depreciation of the Brazilian Real against the U.S. dollar. Excluding foreign exchange variation effects, refining cost, in R$/barrel, increased by 18%, reflecting higher employee compensation costs attributable to the 2014 Collective Bargaining Agreement, along with a decrease in feedstock processed.

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FINANCIAL AND OPERATING HIGHLIGHTS

GAS & POWER

Earnings were a US$ 576 million gain in Jan-Sep/2015 compared to a US$ 549 million loss in Jan-Sep/2014 mainly due to an increase in natural gas sales margins, resulting from higher natural gas prices (when expressed in Brazilian Reais) and lower natural gas import costs (LNG and Bolivian gas).

The net loss of US$ 549 million in Jan-Sep/2014 was due to impairment of trade receivables from companies in northern Brazil (operating in the isolated electricity system) and write-off of overpayments incorrectly capitalized.

Electricity sales to the Brazilian free contracting market (Ambiente de Contratação Livre – ACL) were 27% lower, attributable to the shift of a portion of our available capacity (1,049 average MW) to the Brazilian regulated market (Ambiente de Contratação Regulada – ACR).

Electricity generation was 7% 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 available capacity of the Petrobras’s Thermal Power Plants Complex.

LNG imports decreased by 13% and natural gas imports from Bolivia were 2% lower, reflecting an increase in domestic natural gas supply attributable to a 12% increase in production.

Electricity prices in the spot market decreased by 65% as a result of changes in the spot market price regulation established by the Brazilian National Electricity Agency (Agência Nacional de Energia Elétrica – ANEEL), which reduced the maximum spot price after December 27, 2014.

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FINANCIAL AND OPERATING HIGHLIGHTS

DISTRIBUTION

Net income was US$ 171 million in Jan-Sep/2015, a 48% decrease when compared to Jan-Sep/2014 (US$ 330 million), mainly due to lower average trade margins (9.1%) and to a decrease in sales volumes (5%).

The Jan-Sep/2014 period was affected by our Voluntary Separation Incentive Plan (PIDV).

Market share decreased mainly due to a general increase of the hydrated ethanol market (a 42.2% increase), in which Petrobras Distribuidora has a lower market share and to lower sales to the thermoelectric sector. Other players have also increased their competitiveness by importing gasoline and diesel and purchasing higher volumes of gasoline.

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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 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 Jan-Sep/2015 when compared to Jan-Sep/2014 due to higher selling expenses, write-off of exploration areas returned and impairment charges. In addition, the Company also recognized a gain on disposal of onshore E&P areas in Colombia in Jan-Sep/2014.

Consolidated international crude oil and NGL production decreased by 20%, reflecting the disposal of onshore areas in Peru in November 2014, in Colombia in April 2014 and in the Austral Basin in Santa Cruz, Argentina, in March 2015. These effects were partially offset by an increase in production due to the start-up of the Saint Malo field in December 2014 and the Lucius field in January 2015 in the United States.

Natural gas production decreased by 5% mainly due to the disposal of onshore assets in Peru, in November 2014, and in the Austral Basin in Argentina, in March 2015. These effects were partially offset by the production start-up of the Hadrian South field in the United States in the end of March 2015.  

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FINANCIAL AND OPERATING HIGHLIGHTS

International lifting cost was 10% lower, mainly in the United States, as a result of the production start-up of the Saint Malo, Lucius and Hadrian South fields that have lower-than-average lifting costs, and to the disposal of onshore assets in Peru and Colombia, which had higher-than-average lifting costs.

International feedstock processed was 19% lower due to the interruption of feedstock processing at the Okinawa Refinery in Japan since April 2015, and due to a maintenance scheduled stoppage in the Pasadena Refinery distillation unit in the United States from the beginning of March 2015 to mid-April 2015.

International refining cost per unit was 5% higher, mainly due to higher employee compensation costs in Argentina and to the interruption of feedstock processing at the Okinawa Refinery in Japan since April 2015, which had lower-than-average costs per unit.

BIOFUEL

Biofuel losses were 44% higher in Jan-Sep/2015, when compared to Jan-Sep/2014, due to impairment losses in biofuel investees, reflecting changes in the Company’s 2015-2019 Business and Management Plan, partially offset by improved biodiesel trade margins attributable to higher average sales prices and increased sales volumes in 2015.

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FINANCIAL AND OPERATING HIGHLIGHTS

Sales Volumes – (Mbbl/d) ^(*)

Our domestic sales volumes decreased by 6%, primarily due to:

·           Diesel (a 7% decrease):

i) a lower consumption by infrastructure construction projects in Brazil;

ii) a higher share of diesel sales from other market players (based on diesel imports); and

iii) an increased percentage of mandatory biodiesel content requirement in diesel (diesel/biodiesel mix).

These effects were partially offset by an increase in the Brazilian diesel-moved light vehicle fleet (vans, pick-ups and SUVs).

·           Gasoline (a 10% decrease):

i) an increase in the anhydrous ethanol content requirement for Type C gasoline (from 25% to 27%);

ii) a higher share of gasoline sales from other market players; and

iii) a decrease in the automotive gasoline-moved fleet.

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

·           Fuel oil (a 9% decrease): due to lower demand from thermoelectric and industrial sectors in several Brazilian states.

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FINANCIAL AND OPERATING HIGHLIGHTS

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows – Summary²⁴

As of September 30, 2015, the balance of cash and cash equivalents increased by 51% when compared to the balance as of December 31, 2014 and the balance of adjusted cash and cash equivalents²⁵ for the same period increased by 1% . Our principal uses of funds in Jan-Sep/2015 were for repayment of long-term financing (and interest payments) and for capital expenditures. We met these requirements with cash provided by operating activities of US$ 19,336 million and with proceeds from long-term financing of US$ 15,830 million.

Net cash provided by operating activities decreased by 7% in Jan-Sep/2015 when compared to Jan-Sep/2014, mainly due to a depreciation of the Brazilian Real against the U.S. dollar. Excluding foreign currency translation effects, net cash provided by operating activities increased by 29% when expressed in Brazilian Reais, reflecting higher diesel and gasoline prices, increased crude oil export volumes, lower production taxes and decreased crude oil and oil product imports costs, along with a higher share of domestic crude oil on feedstock processing and lower oil product imports.

Capital expenditures and investments in operating segments were 35% lower in Jan-Sep/2015 compared to Jan-Sep/2014, mainly due to a decrease in capital expenditures in our Refining, Transportation and Marketing (RTM) segment. The US$ 7,610 million of divestments in marketable securities relates 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).

Net cash flow was positive in Jan-Sep/2015 (US$ 10,336 million) compared to a negative net cash flow in Jan-Sep/2014 (US$ 9,058 million).

The Company raised long-term financing of US$ 15,830 million in Jan-Sep/2015, mainly through a US$ 5 billion funding agreement 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 7.49 years as of September 30, 2015.

Repayments of interest and principal were US$ 16,571 million in Jan-Sep/2015, 37% higher than US$ 12,103 million in Jan-Sep/2014 and 41% higher in the 3Q-2015 when compared to 2Q-2015.

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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 US$ 17,644 million in Jan-Sep/2015, primarily aiming at increasing crude oil and natural gas production.

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FINANCIAL AND OPERATING HIGHLIGHTS

Consolidated debt

As of September 30, 2015, net debt in U.S. dollars was 5% lower when compared to December 31, 2014.

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FINANCIAL AND OPERATING HIGHLIGHTS

FINANCIAL STATEMENTS

Income Statement - Consolidated³¹

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FINANCIAL AND OPERATING HIGHLIGHTS

Statement of Financial Position – Consolidated

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FINANCIAL AND OPERATING HIGHLIGHTS

Statement of Cash Flows – Consolidated