Petrobras. Equity Research. New management in a challenging environment. Latin America Oil, Gas & Petrochemicals Company Note 09 February 2015

Transcription

1 Equity Research Petrobras New management in a challenging environment New management confirmed. Internal solution. Negative reaction. Petrobras' confirmed last Friday the appointment of Aldemir Bendine as its new CEO, effectively moving the CEO and CFO of Banco do Brasil to the company. The move disappointed the market that seemed to be expecting a private sector name with fewer ties to the government. We had little hopes of that and ended up seeing the appointment with more of a silver lining to it. Challenges on the rise. Gov. approval down. E&P now implicated in Car Wash. In spite of the silver lining, risks for Petrobras' investment case seem to be rising, in our view. A significant drop in government approval ratings this weekend could make asset sales less possible, while the full disclosure of a plea bargain agreement last week could make the production growth guidance for the next years less solid. In a sense, risk of rating pressure is on the rise, and with it risk of dilution, in our view. Latin America Oil, Gas & Petrochemicals Company Note 09 February 2015 Rating 12m Price Target Price RIC: PBRa.N, BBG: PBR/A US Trading Data and Return Forecasts Neutral US$11.00 US$6.59 (ADR) 52-wk range US$ Market cap. US$42,982m Shares o/s (m) 6,522.3 ADR ratio 1 ADR: 2 LOCAL Free float 52% Avg. daily volume('000 Shares) 13,091 Avg. daily value (US$ m) Forecast price appreciation +66.9% Forecast dividend yield 11.9% Forecast stock return +78.8% Fixable. But capital increase still more appealing. Neutral. In spite of the challenging outlook, we are maintaining our Neutral rating unchanged for Petrobras at present. We do so believing that its balance sheet is still fixable and that addressing that could unlock a significant amount of value for the stock. Sadly, however, we see a much higher chance of the government choosing to raise more equity at the company and hence, we maintain our Neutral rating. Valuation: $11/ADR Our target represents the weighted average of two alternate valuations for Petrobras. A capital increase value of $8/ADR to which we ascribe an 80% possibility and a balance sheet turn around scenario that puts value at $21/ADR. Valuation 12/ / /2014E 12/2015E 12/2016E RoIC (EBIT) % EV/EBITDA P/E Net dividend yield % Financials (US$mn) 12/ / /2014E 12/2015E 12/2016E Revenues 143, , , , ,770 EBITDA 27,200 26,717 28,065 28,032 35,902 Net Income 10,838 10,948 9,008 8,128 12,477 EPS (US$) Net DPS (US$) Net (debt) / cash (72,116) (94,573) (106,000) (118,204) (127,826) Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price of the year; (E) based on a share price of US$6.59, on 06 February Stock Performance (US$) Feb-12 9-May-12 9-Aug-12 9-Nov-12 9-Feb-13 9-May-13 9-Aug-13 9-Nov-13 9-Feb-14 9-May-14 9-Aug-14 9-Nov-14 Price Target (US$) Stock Price (US$) Rel. Ibovespa (US$) Gustavo Gattass Brazil Banco BTG Pactual S.A. gustavo.gattass@btgpactual.com Andres Cardona Colombia - BTG Pactual andres.cardona@btgpactual.com Feb ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 12 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 09 February 2015 page 2 Not Miguel, but maybe Daniel... Rising challenges in spite of the silver lining... Last week we argued that we saw very little room for the market's high expectations of a new management team at Petrobras with a star name from the private sector playing out. We had not been expecting Mr. Bendine to be appointed CEO, but his appointment did fit with our expectations from an "in house" solution to Petrobras' mass resignation. We had thus not been as disappointed as the market when the new management was appointed. If anything, we saw in it a relevant silver lining with regards to the creative asset sale management implemented in the last years at Banco do Brasil. We still believe that this angle could be good for Petrobras, should the new management try to play that card. Investors would love to see that Petrobras is less attached to its core assets than it was in the past. Asset "attachment" had usually been seen as an impediment for Petrobras to address its balance sheet without a dilutive capital increase, which we continue to fear as our main concern for the stock. But as we look at the latest developments we are actually led to wonder if this historical edge that Mr. Bendine and Mr. Monteiro bring to the board may still be realistic at all... President(a) Rousseff's falling approval ratings could make any relevant asset sales an unrealistic proposition for the company. The sale of core assets or a dilution of those assets in the hands of minorities might not be possible. And adding fuel to the fire, clear indications that the many of the suppliers of Brazil's sourced equipment for Petrobras have been involved in Petrobras' corruption ring add risks of lower production growth in future years. We are thus reiterating our Neutral rating here. We believe we see more upside risk in the new management than the market does. But headwinds are rising and Petrobras' capital increase remains the most likely scenario for us.

3 09 February 2015 page 3 The new team and our silver lining Last Friday, Petrobras' board approved, with three dissenting votes from its independent board members, the appointment of the company's new executive directors and the appointment of its new CEO, Aldemir Bendine, to the company's Board of Directors. Mr. Bendine comes from government-controlled Banco do Brasil and has been painted as a personal choice of Brazil's President for the job. Table 1: The new team of Executives of Petrobras Current Previous position CEO Aldemir Bendine Banco do Brasil CEO CFO Ivan Monteiro Banco do Brasil CFO E&P (interim) Solange Guedes Exec. Manager for E&P w ith reserve focus G&P (interim) Hugo Repsold Jr. Exec. Manager for G&P w ith E&P background Refining (interim) Jorge Ramos Exec. Manager for Logistics in Refining Procurement (interim) Roberto Moro Exec. Manager for Subsea Procurement Services José Dutra Position unchanged Governance João Elek Jr. Position unchanged Source: BTG Pactual Both the market and Brazil's press took the new CEO's appointment with a clearly negative spin. As we flagged in our last note, we believed that expectations had been too high for the new management and, in part, what we see is a consolidation of those high expectations into a disappointing outcome. But curiously, our read on the new management team is a bit more benign, given our own biases. As we see it, the new executive directors, and the new CFO in particular, bring with them an interesting track record from Banco do Brasil of taking creative steps to monetize lesser known assets of the bank to reduce the need to call in new capital for the institution over the last years. The listing of BB Seguridade, a property fund backed by its branches and an M&A deal with its cards business make us wonder. Mr. Bendine is seen as loyal government soldier by the market and time will tell if that view is fair or not. But if the management were to point to a significant focus on monetizing both non-core assets and, more importantly, sacred cows with a potential listing of BR Distribuidora (Petrobras' BB Seguridade) in the short term, balance sheet concerns could see a relevant drop and expectations might rise. A tougher challenge rests, in our view, on the execution of Petrobras' production growth plans. The departure of Director Formigli and the retirement of Mr. Fraga who was the key manager in charge of the pre-salt development leave a vacuum that raises some concern for us in light of the corruption related challenges that Petrorbas has been facing. Fumbling here is a risk that could endanger Petrobras' ratings.

4 09 February 2015 page 4 The rising challenges While the appointment of Petrobras' new management team was the focus of both investors and the press, we believe that it comes in the face of two other relevant developments that could be of key importance to Petrobras' investment case: (i) the full disclosure of a plea bargain agreement that implicates Petrobras' E&P investments in the corruption scandal; and (ii) a massive drop in gov. populatiry. As we see it, these two events bring an additional layer of risk to Petrobras' investment case and support a greater deal of caution in spite of the silver lining that we see in the appointment of its new management team. For us, there may be rising risks in both the production growth front and on the fuel pricing front, with an added level of aversion to asset sales. The corruption scandal update As of last Thursday, Brazil's legal system made available the write ups of the plea bargain agreement of Pedro Barusco, Petrobras' former Executive Manager of the company's Procurement Directorship. The write up clearly implicated a number of the company's E&P suppliers that had, up to now, been absent of the corruption allegations and raised our concerns over the coming projects. Of note, we'd flag... Mr. Barusco alleged that he had been receiving side payments from SBM since the mid-nineties over SBM's leasing contracts with Petrobras Mr. Barusco alleged that most of Brazil's yards had been paying "commissions" to Petrobras and government officials in the "local content projects" There are now allegations that leasing contracts might be involved... Table 2: Corruption allegations over key E&P projects Company Rate (%) E&P projects mentioned EAS % P55 hull and seven drillships Engevix 1.0% 8 hulls for pre-salt FPSOs P66 to P73 and three drillships Floatec 1.0% P61 TLP for PapaTerra KeppelFELS % P53 hull, P58 hull, P51, P52, P56 and six drillships QUIP 1.0% P53 integration SBM 1.0% P53 turret, P57 and PRA-1 Monobuoy Jurong % Six drillships Enseada % P59, P60 and six drillships Source: Brazil's Federal Police... and strong indications that Brazil's local content program was widely exposed While the projects mentioned date back to before Mrs. Foster's administration, the companies involved are similar to those involved in the construction of Petrobras' current book of projects that support Petrobras' production growth plans for the next three years. The allegations don't lead the projects to be cancelled, but they could lead to more confusion and delays than Petrobras would like.

5 09 February 2015 page 5 Table 3: Petrobras' upcoming production units Unit Lease Contractor Comments 2015 FP-Itaguai Yes Modec Under const. in KeppelFELS* 2016 FP-Maricá Yes SBM* Integration in Brasa FP-Saquarema Yes SBM* Integration in Brasa FP-Caraguatatuba Yes Modec To integrate in KeppelFELS* P-66 No Engevix*/KeppelFELS* Integrating in KeppelFELS* P-74 No Enseada*/Setal* Hull still at Enseada P-67 No Engevix*/Mendes Junior* Hull still at Engevix P-75 No Enseada*/RIG* Hull aw aiting Enseada Note: The * flags companies mentioned in the plea bargain report. Source: BTG Pactual All of Petrobras' new units for 2015 and 2016 are exposed to companies with corruption allegations Under normal circumstances, delays in production unit start-ups could be dismissed as a non-issue for Petrobras. However, with a greater level of pressure from credit rating agencies at present, we believe that relevant delays in Petrobras' projects and increased risk of non-delivery could increase the pressure over Petrobras to address its high leverage in other ways, raising the chances of a capital increase. Crashing government support The second layer of rising concerns that we saw over the weekend was the disclosure of a popular sentiment poll by Datafolha that indicated a major crash in President(a) Rousseff's approval ratings since December. As the first such relevant poll to come out since the President(a)'s re-election, it's sharp signal was said to come as a relevant concern for the government. Table 4: Government evaluation ratings from Datafolha Crashing government support puts potential asset sales at risk in our view. Source: Datafolha Under normal circumstances, again, we'd say that such polls were of little relevance for Petrobras' investment case. But with (i) our view that oil might recover in the near term; and (ii) the potential we see from Petrobras' new management to consider

6 09 February 2015 page 6 asset sales as a solution for the high level of leverage of the company, it does gain a much more relevant weight. The appointment of Brazil's new Finance Minister, Joaquim Levy, was followed by a number of "unpopular" measures that the market applauded as necessary steps that were being taken by President(a) Rousseff in spite of their political cost. Petrobras was positively "impacted" by a tax rise for fuels that was not charged on the company, but rather on its consumers, sending one such positive signal. But we were secretly hoping for more and now we fear that such hopes may be at risk. In our base case forecasts we were expecting to see oil prices rally from the second quarter, with a high potential for some fuel price increases that could leave investors a bit more comfortable with Petrobras' cash flows. With the impact that these bring to inflation, they may no longer be reasonable. We had also started to believe, last Friday, that Petrobras could be delivering some interesting asset sale solutions to address its balance sheet leverage, in a way that was similar to Banco do Brasil's strategic moves under the Bendine administration, namely: (i) the listing of its insurance arm; (ii) the sale of a property fund backed by its branches; and (iii) the sale of its card issuance business. But here too, popularity may bring about a risk. While it is possible to design a number of asset sales that might not spark popular dissent, any asset sale can be drawn by the opposition in Brazil as a signal that "mismanagement of Petrobras in the last years was so strong that the government was now having to sell assets," which might resonate with the doubts Brazil's population is now having. Risks here too.

7 09 February 2015 page 7 What would we like to see from the new management? In this last section of the report we have moved away a bit from market moving events just reminisce some on Petrobras' latest CEOs and the themes of corruption and government interference. To many it seems that Petrobras' management change is coming as a result of the corruption scandal. But we find that submission to government priorities may have been far more costly for investors over the years. That distinction offers an interesting spin on the market's reaction to Mr. Bendine's appointment. For all the risk that the corruption problem now brings to Petrobras' liquidity, it appears that the bribes paid to employees and politicians added to no more than some R$4.1bn, or $1.5bn. Submission to government priorities of (i) stimulating the local economy; or (ii) curbing inflation cost much more. Ideally, we'd like to see five focuses from the new management: A drive to cut down Capex even more than the outgoing management had guided for with a further reduction in downstream spend and a significant cut to exploration spending too, so as to neutralize cash flow. A strong focus on the timely delivery of Petrobras' production units for , so as to allow the company to, as quickly as possible, recover some of the cash spent in the last years on the projects. A clear plan and commitment to lower absolute debt levels over the course of the next years, even if at the expense of some production growth, to avoid guidance of flat leverage on hopes of higher growth. A near term solution for Petrobras' accounting uncertainties with a clear commitment to publish audited third quarter results (not only the fourth quarter) as quickly as possible. A clear, open and widely disclosed commitment to raise fuel prices in Brazil as soon as domestic fuel prices dip below international import parity, so as to signal that government influence is waning. Ultimately, these may all seem to be simple things to expect out of any company. But Petrobras' recent history, which we've looked at a bit more below, shows that they are not. In many ways recent history has shown that Petrobras' management aimed on growth rather than caution. To better understand it, we've looked at five key metrics that show Petrobras' evolution in between CEOs. Market value When José Sergio Gabrielli became the CEO of Petrobras in July 2005, Petrobras' market cap added to $137bn and it had an EV of $146bn. Under his watch, the company raised some $72bn in new equity, but by the end of this term, the company had a market cap of $160bn and an EV of $232bn. Maria das Graças Foster took over then and turns over the company to Mr. Bendini with $43bn market cap.

8 09 February 2015 page 8 Chart 1: Looking at the evolution of Petrobras' value ($bn) During Gabrielli's tenure, absolute value increased, but net debt was gaining space End Dutra (07/05) End Gabrielli (02/12) End Graça (02/15) Mkt cap Debt Cap. inc. EV Source: BTG Pactual The change in value can be seen as the outcome of all that has happened over the years with Petrobras, including both its management decisions and the impacts of the significant changes in the last years in the market itself. Still, in this same period, Exxon saw its market cap increase by 93%, and CNOOC saw its equity value grow by 2.6x times. PBR would be worth at least six times more if it did that well. Capex We tend to believe that there are two facets of Petrobras' day to day life that suffer the most influence from government influence: (i) Capex and (ii) domestic fuel prices of gasoline and diesel. Here, we look at Capex and at the massive increase in spend that Petrobras sponsored after it was able to achieve an investment grade rating for its debt. Chart 2: Looking at the evolution of Petrobras' Capex ($bn) End Dutra (2004) End Gabrielli (2011) End Graça (LTM) Capex saw an incredible rise during Gabrielli's tenure... Capex ($bn) Source: BTG Pactual

9 09 February 2015 page 9 At the time of Mr. Gabrielli's inauguration, Petrobras was spending some $7.4bn in Capex per year. At the end of his tenure, Capex had ballooned to $43.3bn in 2011 with most of the increase coming after the 2008 crisis and the 2007 investment grade rating. Mrs. Foster was able to lower this figure to $40.2bn in the last twelve months to the end of the third quarter, and Petrobras now aims for $31-33bn. Net debt Rising leverage has been one of the saddest traits of Petrobras' recent history. A clear result of the massive increase in Capex with a much smaller increase in cash flow generation, Petrobras' leverage grew massively both in the Gabrielli years, by $78bn if we consider the capital increase, and in the Foster years, by $52bn. As Mr. Bendine takes over, net debt stands at $107bn. Chart 3: Looking at the evolution of Petrobras' net debt ($bn) Net debt rose even more. And would have been higher still were it not for the capital increase End Dutra (2004) End Gabrielli (2011) End Graça (LTM) Net debt ($bn) Cap. inc. ($bn) Source: BTG Pactual Production and production guidance Production has grown over the years. But it is important to note that it has grown by significantly less than guided by the CEO's at the time of their inauguration. During the Gabrielli years, growth reached 2.8% per year, but was consistently guided to be between 7-9%. During Mrs. Foster's tenure, production was up 1.6% per year, but here too plans were for stronger performance. Growing less than expected is not something that only Petrobras does. But given that the company staked so much of its new investment on future cash generation that would come from the higher production in the future, we believe that the optimistic production figures served to support much higher stimulus for the Brazilian economy than would have been prudent, on hindsight.

10 09 February 2015 page 10 Chart 4: Looking at the evolution of Petrobras' domestic oil production (kbd) 2,500 For the amount of leverage being added to the balance sheet, growth was actually small... 2,000 1,500 1, ,755 2,110 2,212 0 End Dutra (Jun/05) End Gabrielli (Jan/12) End Graça (Dec/14) Dom. Crude Prod. (kbd) Source: BTG Pactual ROIC Return on invested capital is perhaps one of the most important metrics in the evaluation of any company as it clearly doles out judgment on the quality of the growth being delivered by any given company. And on this metric, Petrobras has deteriorated massively. When Mr. Gabielli took over the company, ROIC was running at 33%. Chart 5: Looking at the evolution of Petrobras' ROIC (%) 35.0% Nothing one can say here % 25.0% 20.0% 15.0% 32.7% 10.0% 5.0% 0.0% 11.3% 5.4% End Dutra (2004) End Gabrielli (2011) End Graça (LTM) ROIC Source: BTG Pactual When he turned it over to Mrs. Foster, ROIC had already fallen to 11%. But as she turns the company over to Mr. Bendine, ROIC was running at less than half the rate of the last change of control at 5% in the last twelve months into the third quarter of 2014 i.e. before oil prices saw any significant collapse. Lower operational results play a part here, but much more comes from ballooning assets.

11 Petrobras 09 February 2015 page 11 Petrobras Income Statement (US$mn) 12/ / / / / /2014E 12/2015E 12/2016E Revenue 91, , , , , , , ,770 Operating expenses (ex depn) (61,685) (86,923) (109,015) (116,776) (114,903) (114,329) (84,929) (97,868) EBITDA (BTG Pactual) 29,715 34,166 36,766 27,200 26,717 28,065 28,032 35,902 Depreciation (7,387) (8,409) (10,591) (11,137) (13,223) (12,760) (13,149) (14,031) Operating income (EBIT, BTG Pactual) 22,328 25,757 26,176 16,063 13,494 15,305 14,883 21,871 Other income & associates (1,462) ,377 8,223 (676) (74) (72) Net Interest 0 1, (3,239) (8,640) (3,589) (3,957) (4,439) Abnormal items (pre-tax) Profit before tax 20,866 27,330 26,479 14,201 13,077 11,040 10,851 17,360 Tax (4,991) (6,947) (6,711) (3,476) (2,391) (1,966) (2,554) (4,799) Profit after tax 15,875 20,383 19,768 10,724 10,687 9,074 8,297 12,561 Abnormal items (post-tax) Minorities / pref dividends (1,377) (404) (66) (169) (84) Net Income (local GAAP) 14,498 19,979 19,889 10,838 10,948 9,008 8,128 12,477 Adjusted Net Income 14,498 19,979 19,889 10,838 10,948 9,008 8,128 12,477 Tax rate (%) Per Share 12/ / / / / /2014E 12/2015E 12/2016E EPS (local GAAP) EPS (BTG Pactual) Net DPS BVPS Cash Flow (US$mn) 12/ / / / / /2014E 12/2015E 12/2016E Net Income 14,498 19,979 19,889 10,838 10,948 9,008 8,128 12,477 Depreciation 7,387 8,409 10,591 11,137 13,223 12,760 13,149 14,031 Net change in working capital 0 (5,883) (191) 1,195 1,781 (2,863) Other (operating) Net cash from operations 21,885 22,506 30,803 22,286 23,980 22,962 23,058 23,645 Cash from investing activities 0 (43,383) (43,312) (40,557) (45,538) (39,450) (35,853) (33,749) Cash from financing activities 0 29,479 (7,686) (7,189) (3,816) 1,532 (18,253) (6,534) Bal sheet chge in cash & equivalents 9,665 12,232 (669) (4,066) (4,198) 3,011 (12,151) (431) Balance Sheet (US$mn) 12/ / / / / /2014E 12/2015E 12/2016E Cash and equivalents 16,455 28,687 28,017 23,951 19,753 22,764 10,612 10,181 Other current assets 42,433 58,688 58,533 56,947 51,685 46,022 41,097 45,794 Total current assets 58,888 87,374 86,550 80,898 71,438 68,786 51,709 55,975 Net tangible fixed assets 131, , , , , , , ,802 Net intangible fixed assets Investments / other assets 7,041 55,364 50,396 45,845 22,085 12,534 12,183 11,842 Total assets 197, , , , , , , ,619 Trade payables & other ST liabilities 39,422 45,519 49,735 56,475 47,253 47,369 44,152 46,816 Short term debt Total current liabilities 39,422 45,519 49,735 56,475 47,253 47,369 44,152 46,816 Long term debt 56,909 70,754 82,927 96, , , , ,008 Other long term liabilities 9,117 9,981 9,639 10,063 10,722 9,461 9,196 8,938 Total liabilities 105, , , , , , , ,762 Equity & minority interests 92, , , , , , , ,858 Total liabilities & equities 197, , , , , , , ,619 Company Profile: Petrobras is a mixed-capital corporation that began operations in Brazil in 1954, and it is linked to Brazil's Ministry of Mines and Energy. Petrobras is the largest publicly traded oil company in Latin America. It operates in the exploration, development, production, refining, processing, trading, and transportation of crude oil, oil products, natural gas, and other fluid hydrocarbons. Financial ratios 12/ / /2014E 12/2015E 12/2016E EBITDA margin 18.9% 18.9% 19.7% 24.8% 26.8% Operating margin 11.2% 9.5% 10.7% 13.2% 16.4% Net margin 7.5% 7.7% 6.3% 7.2% 9.3% RoE 6.3% 6.9% 6.5% 6.4% 9.7% RoIC 6.7% 5.5% 6.3% 6.1% 8.6% EBITDA / net interest 8.4x 3.1x 7.8x 7.1x 8.1x Net debt / EBITDA 2.7x 3.5x 3.8x 4.2x 3.6x Total debt / EBITDA 3.5x 4.3x 4.6x 4.6x 3.8x Net debt / (net debt + equity) 29.9% 38.8% 45.4% 48.1% 49.4% Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(e) based on share price as of 06 February 2015

12 09 February 2015 page 12 Required Disclosures This report has been prepared by Banco BTG Pactual S.A. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. BTG Pactual Rating Buy Neutral Sell Definition Coverage *1 IB Services *2 Expected total return 10% above the company s sector average. Expected total return between +10% and -10% the company s sector average. Expected total return 10% below the company s sector average. 46% 42% 48% 47% 6% 15% 1: Percentage of companies under coverage globally within the 12-month rating category. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Absolute return requirements Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 50% must be rated Buy Analyst Certification Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be; (ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein. Research analysts contributing to this report who are employed by a non-us Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A. and/or its affiliates. Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature list. Statement of Risk Petrobras is exposed to a number of risks in its activities that include: (i) exploration risk in its oil exploration portfolio; (ii) execution risk on new production and downstream assets; (iii) commodity price risks on its day to day marketing and trading businesses; and (iv) administrative risks due to the potential change in management that the company faces every four years, in line with Brazil's presidential elections. The most relevant risks to our forecasts focus on Petrobras' ability to increase its oil and gas production, its ability to keep domestic fuel prices high enough to maintain profitability of its refining assets and the Brazilian exchange rate. Valuation Methodology N.A. Company Disclosures Company Name Reuters 12-mo rating Price Price date Petrobras 1, 2, 4, 6, 18, 20 PBRa.N Neutral US$ Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. 4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided. 6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity. 18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities 20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.

13 09 February 2015 page 13 Petrobras 50.0 Stock Price (US$) Price Target (US$) Feb-12 9-May-12 9-Aug-12 9-Nov-12 9-Feb-13 9-May-13 9-Aug-13 9-Nov-13 9-Feb-14 9-May-14 9-Aug-14 9-Nov-14 9-Feb-15 Buy Neutral Sell No Rating Source: BTG Pactual and Economatica. Prices as of 06 February 2015

14 09 February 2015 page 14 Global Disclaimer This report has been prepared by Banco BTG Pactual S.A. ( BTG Pactual S.A. ), a Brazilian regulated bank. BTG Pactual US Capital LLC ( BTG Pactual US, ), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A.. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. 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