Consolidated net income attributable to the shareholders of Petrobras reached US$ 11,094 million in 2013 and US$ 2,760 million in the 4Q-2013.  Adjusted EBITDA reached US$ 29,426 million in 2013.

Highlights

 The Company reported 4Q-2013 earnings of US$ 2,760 million and the following highlights: 

·     Proved reserves reached 13.12 billion barrels of oil equivalent (BOE) according to SEC criteria, with a 43% increase on pre-salt proved reserves compared to 2012. Reserves-to-Production ratio (R/P) in Brazil was 15.7 years and the reserve replacement ratio (RRR) was 135%.

·     Higher domestic crude oil and NGL production (a 2% increase, 36 thousand barrels/day), due to the production start-up of new systems: FPSO Dynamic Producer (Lula Central), FPSO Cidade de São Vicente (Lula Extremo Sul) and P-63 (Papa Terra). In December the Company reached the crude oil production level of 371 thousand bpd at the pre-salt layer.

·     Discovery of a crude oil reservoir in the deep waters of the Potiguar Basin and confirmation of the potential of Moita Bonita area located in the ultra-deep waters of the Sergipe Basin.

·     Declaration of commerciality of crude oil and natural gas reservoirs included in the Assignment Agreement area, Franco and Sul de Tupi, and of the crude oil reservoir at the Carioca area, in the pre-salt layer of Santos Basin.

·     Diesel and gasoline prices increased by 8% and 4%, respectively, as from November 30, 2013, based on the pricing policy for these oil products.

·     Disposal of assets within the Divestment Program, including interest held in Parque das Conchas Offshore Project (BC-10), which resulted in a US$ 446 million gain, and the approval of disposal of assets in Peru and Uruguay. Cash provided by the disposal of assets reached US$ 1,756 million in the 4Q-2013.

·     Proposed dividends of US$ 3,970 million, distributed as interest on capital in the amount of US$ 0.22 per common share and US$ 0.41 per preferred share. Interest on capital is a form of dividend distribution which is deductible for tax purposes, thus resulting in a tax benefit of US$ 1,389 million in 4Q-2013 to the Company.

Comments from the CEO
Mrs. Maria das Graças Silva Foster

Dear Shareholders and Investors,

Our 2013 net income was US$ 11.1 billion, a 1% rise from 2012’s result. This rise was influenced by higher fuel sale prices, due to three diesel and two gasoline price increases during the year, by the significant increase in oil products production at our refining facilities, by significant cost cutting and productivity boost as well as by the gains from asset sales.

Indeed, 2013 stands out for the successful implementation of our Structuring Programs, which by establishing new benchmarks for productivity and management of investment projects, imposed discipline in the use of the company’s financial resources.

Notably, through PROCOP – Operating Expenses Optimization Program – we reached savings of US$ 2.8 billion in 2013, far exceeding the US$ 1.7 billion target set for the year. The sale of assets under PRODESIN – Divestment Program – contributed US$ 3.8 billion to Cash Flow in 2013. Since this program was established in 2012, 21 transactions worth US$ 10.0 billion in asset sales and financial restructuring have been made.

The Structuring Programs have also brought the benefit of avoiding capital expenditures in 2013, as is the case with PRODESIN, INFRALOG – Logistical Infrastructure Optimization Program – and PRC-Poço – Well Cost Reduction Program, which, combined, have led to CAPEX savings of US$ 0.9 billion in the year.

We made further advances by establishing targets aimed at better positioning company personnel in order to meet the challenges of our Business and Management Plan. During the second half of 2013, we implemented Programa Mobiliza, which provided employees with 3,399 opportunities to move internally into areas that will require more personnel in the coming years, resulting in 1,133 voluntary transfers and consequently lower costs arising from new hires.

Another recently launched initiative was POP – Productivity Optimization Program, which resulted in the approval of the Voluntary Separation Incentive Plan, with voluntary enrollment until March 31, 2014. The plan covers eligible employees aged 55 or older and, in theory, can include up to 8.397 employees, approximately 10% of the company’s personnel.

Our oil output in Brazil averaged 1,931 thousand bpd, down by 2.5% from the forecast, due to factors already discussed in my previous letter, which include delay of the Buoyancy Supported Riser Systems for FPSOs Cidade de São Paulo and Cidade de Paraty, the need to make changes to the subsea layout of the Papa-Terra/P-63 project, as well as the limited number of PLSVs (Pipe-Laying Support Vessels).

We would like to point out that these matters have already been resolved not only by the unprecedented delivery of nine production units in 2013, with the addition of 1,000,000 barrels per day in capacity, but mainly by the successful installation of the first buoy on FPSO Cid. São Paulo and of the first well interconnected to this gathering system, which went into operation on February 18th, currently producing 36 thousand barrels per day and allowing the presalt production to achieve a new daily record of 407 thousand barrels per day on February 20th. Platforms P-63 and P-55 went into operation in November and December 2013, respectively, and units P-58 and P-62 will begin production in the first and second quarter of 2014 respectively. Six new PLSVs will be delivered in 2014, adding to the 11 vessels of this type that are currently in operation, enabling faster well to platform interconnection.

Improvement in the operational efficiency of older systems was another relevant factor in achieving the result. PROEF – Campos Basin Operational Efficiency Improvement Program – contributed 63 thousand bpd in additional oil output in 2013. Operational efficiency reached 75% at the Campos Basin Operational Unit (against 66% in April 2012) and 92% at the Rio Operational Unit (against 82% in September 2012).

The Petrobras Executive Board has made the implementation of these programs a top priority and, as shown, program results have significantly contributed to the achievement of the 2013 economic/financial result.

Sustained output growth in 2014 will not only count on necessary investments to maintain older and new systems – wells, submarine equipment and top-sides, but it will also count on the start-up of two new production units in the second half of the year,  FPSOs Cidade de Ilhabela and Cidade de Mangaratiba.

As for exploration, our proven reserves in Brazil (SEC Criteria) reached 13 billion barrels of oil equivalent, with a reserves-to-production of 16 years and a reserve-replacement ratio of 135%, above 100% for 22 years in a row. Proven reserves in the pre-salt grew by 43% in 2013. Our exploratory success rate was 75% in 2013, reaching 100% in the pre-salt, already reflecting the Exploratory Policy implemented last year, which prioritizes less-risky locations and allocates more resources to production development activities. In 2013, prospecting and drilling expenses (dry wells) were US$ 2.8 billion, down 22% from US$ 3.6 billion in 2012.

As for the quantification of our production curve as of 2020, I would like to stress the excellent outcome in the auction of Libra field, the first to be developed under the production sharing agreement in Brazil, where we will work in partnership with Shell, Total, CNPC and CNOOC, companies with recognized experience and financial soundness.

In Refining, we continue to operate with excellent efficiency levels, which have led to an average oil products production of 2,124 thousand bpd, up by 6% from 2012’s output of 1,997 thousand bpd, notably due to higher gasoline (+53 thousand bpd) and diesel (+68 thousand bpd) production and a 97% utilization factor, against 94% reported in 2012.

This new operating parameter was achieved by the improved performance of our refineries resulting from the start-up of new units of quality and conversion since 2012, as well as the optimization of refining processes and removal of infrastructural bottlenecks in the movement of oil and oil products. In January 2014, Petrobras also began selling ultra-low sulfur gasoline (Gasoline S-50), a product whose quality is equivalent to that of the strictest markets in the world. This will allow new vehicles containing modern emission treatment technologies to enter the Brazilian market.

This notable performance of the refineries enabled a decline in the imported volumes of diesel (from 190 thousand bpd in 2012 to 174 thousand bpd in 2013) and gasoline (from 87 thousand bpd in 2012 to 32 thousand bpd in 2013), the latter also due to the higher anhydrous ethanol content in gasoline C.

New records were established in natural gas sales and electricity generation due to higher natural gas demand of 85 million m3/day in 2013, up by 15% from 2012. Petrobras-supplied thermoelectric generation was 7.5 GW/average, up by 66% from 2012.

I reiterate that the company’s excellent operational results were achieved by rigorously complying with standards and maintenance procedures at its facilities, ensuring the physical integrity of personnel and equipment. As a result, in 2013 we achieved the lowest reportable incident rates ever in the company’s history, which includes fatal accidents and spills, despite growing man-hours of exposure to risk.

Another important measure also adopted in 2013 related to foreign exchange was the extension of Hedge Accounting to future exports, enabling foreign exchange gains or losses related to net indebtedness exposed to foreign exchange variation to be recorded in stockholders’ equity and transferred to the financial result as exports are made. This measure promotes greater alignment between accounting results and our risk management policy, mitigating sudden oscillations on the financial result due to foreign exchange volatilities, which could not appropriately reflect the company’s economic performance in a given period.

Regarding our Diesel and Gasoline Price Policy, its effectiveness has been assessed on a monthly basis by our Board of Directors, according to the Relevant Fact released on November 29th, 2013.

Additionally, I would like to notice that in the second half of 2013 we implemented the Corruption Prevention Program, reaffirming the commitment of the Petrobras Executive Board and of its employees with ethics and transparency at our organization. The program complies with both national and international initiatives against fraud and corruption, as well as with the laws of the countries where Petrobras operates, with positive impacts in the relations with all its stakeholders.

We are building a higher value company: training our employees, mastering the necessary technologies to implement projects, our relevant oil reserves and rising output in the short-run along with our continuous commitment to increase efficiency, productivity and capital discipline will lead us to achieve even better results. Rising share prices and ensuring a fair return to our shareholders is a natural consequence of fulfilling our obligations.

Maria das Graças Silva Foster

Chief Executive Officer

FINANCIAL HIGHLIGHTS

Main Items and Consolidated Economic Indicators

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FINANCIAL HIGHLIGHTS

RESULTS OF OPERATIONS

2013 compared with 2012:

Virtually all revenues and expenses of our Brazilian operations are denominated and payable in Brazilian Reais. When the U.S. dollar strengthens relative to the Brazilian Real, as it did in 2013 (with an appreciation of 10%), revenues and expenses decrease when translated into U.S. dollars. Nevertheless, the appreciation of the U.S. dollar against the Brazilian Real affects the line items discussed below in different ways. 

Gross Profit

Gross profit decreased by 9% in 2013 compared to 2012, mainly due to: 

Ø Sales revenues of US$141,462 million decreased 2% compared to 2012, driven by foreign currency translation effects (due to the appreciation of the U.S. dollar). Local currency sales revenues were 8% higher, due to:

·   Higher oil product prices in the domestic market resulting from adjustments in gasoline and diesel prices, higher electricity prices and impact of the appreciation of the U.S. dollar (10%) on oil product prices that are adjusted to reflect international prices;

·   A 4% increase in domestic oil product demand, mainly of diesel (5%), gasoline (4%) and fuel oil (17%), offset by lower crude oil export volumes (43%), attributable to lower production levels and higher feedstock processed.

Ø Cost of sales of US$108,254 million increased 1% compared to 2012, due to:

·   A 4% increase in domestic sales volumes of oil products, met by higher oil product output from our refineries;

·   An increase in natural gas imports volumes to meet the thermoelectric demand and higher crude oil import volumes attributable to the increase in feedstock processed in our refineries, along with the impact of the appreciation of the U.S. dollar on our unit costs;

·   Increased crude oil production costs, attributable to the higher number of well interventions and to the production start-up of new systems, which are still not producing in full capacity;

·   Excluding foreign currency translation effects, the local currency cost of sales was 11% higher.

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

Net income before finance expense, share of profit of equity-accounted investments and income taxes reached US$16,214 million in 2013, a 4% decrease compared to 2012, due to the foreign currency translation effects, which reduced gross profit, as well as to the higher employee compensation expenses arising from the 2012 and 2013 Collective Bargaining Agreements and higher freight expenses due to increased domestic sales volume. These effects were partially offset by a decrease in write-offs of dry and sub-commercial wells (US$ 955 million) and by gains on disposal of assets in 2013 (US$ 1,764 million).

Net finance income (expense)

Net finance expense was US$ 2,791 million in 2013, a US$ 865 million increase compared to 2012, resulting from:

·       Lower finance income compared to 2012, when we benefited from the positive impact of gains on disposal of government bonds (National Treasury Notes – B Series) and interest income over judicial deposits (US$ 1,280 million);

·       Higher finance expense due to higher debt and adherence to the federal tax settlement program (REFIS);

·       Partially offset by lower exchange variation losses (US$ 1,636 million) due to the extension of hedge accounting to future exports⁵ , reducing by US$ 5,924 million the impact of foreign currency effects on our finance expenses.

Net income attributable to the shareholders of Petrobras

Net income attributable to the shareholders of Petrobras reached US$ 11,094 million in 2013, a 1% increase compared to 2012 (US$ 11,034 million), reflecting lower income tax expenses and higher share of profit of equity-accounted investments, partially offset by foreign currency translation effects over income before taxes. Local currency net income was 11% higher, due to higher income from operations, lower income tax and higher share of profit of investees.

FINANCIAL HIGHLIGHTS

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.

Our segment results include transactions carried out with third parties and transactions between business areas, which are priced at internal transfer prices defined between the areas using methods based on market parameters.

Information about our operating segments and other related information are set out below.

EXPLORATION & PRODUCTION

Lower net income is attributable to a decrease in crude oil and NGL production (2%), due to the natural decline of fields (slightly offset by the production start-up of new systems), to higher equipment depreciation costs, increased freight costs for oil platforms, higher employee compensation costs and higher well interventions and maintenance costs. Higher domestic crude oil prices (sale/transfer), lower write-offs of dry or sub-commercial wells and a gain on the disposal of our total interest in block BC-10 partially offset these effects.

The spread between the average domestic oil price (sale/transfer) and the average Brent price increased from US$6.98/bbl in 2012  to US$10.47/bbl in 2013. 

Crude oil and NGL production decreased by 2% in 2013 due to the natural decline of fields, partially offset by the production start-up of FPSOs Cidade de São Paulo (Sapinhoá), Cidade de Itajaí (Baúna), Cidade de Paraty (Lula NE Pilot), Dynamic Producer (Lula Central) and Cidade de São Vicente (Lula Extremo Sul), as well as the P-63 platform (Papa-Terra) and a full-year production in FPSO Cidade de Anchieta (Baleia Azul) in 2013.

Natural gas production increased by 4% in 2013 due to the production start-up of FPSOs Cidade de São Paulo and Cidade de Paraty, to the improved efficiency of the Mexilhão, Merluza and Lula fields and to the improved production potential of FPSO Cidade de Vitoria, in Golfinho, as well as to the full-year production in FPSO Cidade de Anchieta (Baleia Azul) in 2013.

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FINANCIAL HIGHLIGHTS

 Lifting Cost - Excluding production taxes

Lifting cost excluding production taxes increased by 7% in 2013 compared to 2012. Excluding the impact of the appreciation of the U.S. dollar against the Brazilian Real, it increased by 13% due to the higher number of well interventions in the Campos Basin, related to PROEF (Operational Efficiency Increase Program), to the production start-up in FPSOs Cidade de São Paulo (Sapinhoá), Cidade de Itajaí (Baúna), Cidade de Paraty (Lula NE Pilot), and the P-63 platform (Papa Terra), with initially higher unit costs, as well as to an increase in employee compensation costs arising from the 2012 and 2013 Collective Bargaining Agreements.

Lifting Cost - Including production taxes

Compared to 2012, lifting cost including production taxes was relatively flat in 2013. The relative increase in lifting cost was more than offset by a decrease in production taxes, attributable to the lower average reference price for domestic oil in U.S. dollars, adjusted to reflect international prices, and to reduced levels of special participation charges in Marlim, Barracuda and Albacora fields, due to lower production when compared to 2012.

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FINANCIAL HIGHLIGHTS

REFINING, TRANSPORTATION AND MARKETING

Net losses were lower in 2013, reflecting the diesel and gasoline price adjustments in the domestic market from June 2012 on, and the higher feedstock processed in our refineries, reducing the share of oil product imports in our sales mix, partially offset by higher crude oil acquisition/transfer costs.

Higher crude oil imports are attributable to higher feedstock processed by our domestic refineries.

Oil product imports were lower due to an increase in oil product output at our refineries. The higher oil product production and lower crude oil production reduced the availability of crude oil volumes to export.

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FINANCIAL HIGHLIGHTS

Daily feedstock processed (excluding NGL) increased by 7% due to the sustainable improvement of operating efficiency of our refineries through the optimization of refining processes and elimination of logistics bottlenecks. The new production level was reached complying with the equipment’s project limitations and the safety, environmental and product quality requirements.

Refining cost decreased by 10% in 2013 compared to 2012. Excluding the impact of the appreciation of the U.S. dollar against the Brazilian Real, it decreased by 1%, mainly due to an increase in feedstock processed and optimized routine maintenance costs. This effect was partially offset by higher employee compensation costs arising from the 2012 and 2013 Collective Bargaining Agreements.

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FINANCIAL HIGHLIGHTS

GAS & POWER

Net income decreased due to higher LNG and natural gas import costs to meet the thermoelectric demand, partially offset by higher thermoelectricity generation and higher average electricity prices, mainly attributable to lower water reservoir levels of hydroelectric power plants located in Brazil (driven by low rainfall), and thus increased difference settlement prices.

Electricity sales volumes were 11% lower mainly due to the termination of long-term agreements in December 2012.

Increased electricity generation (48%) and difference settlement prices (48%) attributable to lower rainfall levels in the period.

An increase in LNG import volumes (56%) and in natural gas imports from Bolivia (14%) is attributable to increased thermoelectric demand in the period.

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FINANCIAL HIGHLIGHTS

BIOFUEL

Biofuel net losses were higher, driven by lower biodiesel average sales prices (11%). This effect was partially offset by a decrease in share of losses of ethanol investments, attributable to increases in ethanol, electricity and sugar sales volumes, as well as the higher average sales prices of ethanol and electricity.

DISTRIBUTION

Net income decreased by 4% compared to 2012. Excluding foreign currency translation effects, local currency net income for distribution was higher due to a 7% increase in the average trade margins and a 4% increase in sales volumes. These effects were partially offset by higher selling and administrative expenses.

  ^(*)

Sales volumes were higher in the 4Q-2013, however market share decreased in 2013 due to a shift in our sales mix for higher margins.

FINANCIAL HIGHLIGHTS

INTERNATIONAL

Net income was higher due to gains on disposal of assets within the Divestment Program (PRODESIN), mainly in Africa and in the United States, and to the recognition of tax credits in the Netherlands. Lower exploration costs and write-offs of wells also had a positive impact. These effects were partially offset by lower crude oil and NGL production.

Crude oil and NGL production was 22% lower due to the disposal in June 2013 of 50% of our interest of companies in Nigeria. As from June 2013, the remaining 50% of the production has been considered non-consolidated production.

Natural gas production also decreased, mainly in Argentina, due to the closure of a natural gas well in the Santa Cruz field, resulting from an increase in water production. (*)  ^[15]

FINANCIAL HIGHLIGHTS

International lifting cost was 7% higher, mainly driven by the disposal of our interest of companies in Nigeria, which had lower-than-average costs, when compared to other assets in the international segment. In addition, there were lower production volumes and higher costs in Argentina attributable to environmental repair services in production storage tanks.

Despite the higher feedstock processed at the U.S. refinery due to increased operational availability in 2013, total feedstock processed was lower, driven by the lower feedstock processed at the Japanese refinery due to unscheduled stoppages and to lower oil products demand, reducing oil products production.

 International refining cost was 5% higher due to the lower feedstock processed in the Japanese refinery.

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FINANCIAL HIGHLIGHTS

Sales Volumes – (Mbbl/d) ^(*)

Our domestic sales volumes increased by 6% in 2013 compared with 2012, primarily due to:

·         Diesel (a 5% increase) – due to the increase in the retail sector, higher thermoelectric consumption, higher grain harvest and an increase in the Brazilian diesel light vehicle fleet.

·         Gasoline (a 4% increase) – due to the increase in the flex-fuel automotive fleet, driven by the higher competitive advantage relative to ethanol in most Brazilian states and to the decreased market share of our competitors. These effects were partially offset by the increase of the anhydrous ethanol content in Type C gasoline (from 20% to 25%).

·         Fuel oil (a 17% increase) – due to increased consumption at thermoelectric plants for electricity generation and higher demand from suppliers of natural gas to thermoelectric plants.

·         Natural gas (a 15% increase) – due to higher thermoelectric demand, driven by lower water reservoir levels at hydroelectric power plants.

FINANCIAL HIGHLIGHTS

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Statement of Cash Flows – Summary²⁰

The resources needed to fund our capital expenditures (US$ 45,163 million) and payment of dividends (US$ 2,656 million) were met by cash flow from operations (US$ 26,289 million), net proceeds from long-term financing (US$ 16,021 million), cash provided by the disposal of assets (US$ 3,820 million), as well as a reduction in our adjusted cash and cash equivalents²¹ balance of US$ 3,986 million.

Net cash provided by operating activities in 2013 increased by 4% in local currency (excluding the foreign currency translation effect), as a result of increases in diesel and gasoline prices in the domestic market during 2013 and by an increase in outputs of refined products (6%), which contributed to a reduction in oil product import volumes. These effects were partially offset by the impact of the depreciation of the Real on import costs and by the lower crude oil export volumes. When translated into U.S. dollars, cash provided by operations decreased from US$ 27,888 million in 2012 to US$ 26,289 million in 2013. 

Proceeds from long-term financing, net of repayments, totalled US$ 16,021 million in 2013, an increase of US$ 6,935 million when compared to 2012. The principal sources of long-term financing were the issuance of a series of U.S. dollar bonds totalling approximately US$ 11 billion in the capital markets in May 2013, and long-term financing from foreign and Brazilian financial institutions.

Proceeds from the disposals of assets throughout 2013 totalled US$ 3,820 million. These divestments were the result of our announced Divestment Program (PRODESIN), with the majority of the proceeds coming from the disposal of 50% of our interest in operations in Africa (via the formation and partial sale of a joint venture combining our African assets) and the disposal of our interest in block BC-10, located in Brazil.

The uses of cash were primarily for capital expenditures and investments in operating units, which totalled US$ 45,163 million in 2013 versus US$ 40,706 million in 2012. Higher expenditures in E&P (US$ 5,200 million), including US$ 2.6 billion related to acquisition costs of rights over the Libra block in the pre-salt area were largely responsible for the increase.

Payment of dividends during 2013 totalled US$ 2,656 million.

As of December 31, 2013, our balance of cash and cash equivalents amounted to US$ 15,868 million, versus US$ 13,520 million as of December 31, 2012. Considering the reduction in our balance of government bonds with maturities of more than 90 days, our adjusted cash and cash equivalents balance was reduced from US$ 23,732 million as of December 31, 2012 to US$ 19,746 million as of December 31, 2013.

FINANCIAL HIGHLIGHTS

Capital expenditures and investments

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

In 2013, we invested an amount of US$ 48,097 million, primarily aiming at increasing production and modernizing and expanding our refineries.

FINANCIAL HIGHLIGHTS

Consolidated debt

On December 31, 2013 the net debt in U.S. dollars was 31% higher than on December 31, 2012, due to the long-term financing raised, partially offset by the impact of 14.6% from the appreciation of the U.S. dollar against the Real.

FINANCIAL HIGHLIGHTS

FINANCIAL STATEMENTS

Income Statement - Consolidated

FINANCIAL HIGHLIGHTS

Statement of Financial Position – Consolidated [26] 

FINANCIAL HIGHLIGHTS

Statement of Cash Flows – Consolidated

FINANCIAL HIGHLIGHTS

SEGMENT INFORMATION

Consolidated Income Statement by Segment – Jan-Dec/2013