By Jeb Blount and Sabrina Lorenzi
RIO DE JANEIRO, Oct 25 (Reuters) - Brazil's state-run oilcompany, Petrobras, said on Friday that quarterly profit fell 39percent from a year ago as rising exploration and administrativecosts drove up spending while fuel subsidies and weak productiongrowth hurt revenue.
The Rio de Janeiro-based company, formally known as PetroleoBrasileiro SA, said net income in the three monthsended Sept. 30 was 3.40 billion reais, missing the averageestimate of 5.84 billion reais ($2.68 billion) in a Reuterssurvey of 10 analysts.
"In addition to the impact of the break between market anddomestic fuel prices at a time of strong demand, we have alsohad greater expenses with dry and sub-commercial wells," ChiefExecutive Maria das Graças Foster said in a statementaccompanying the results. "We plan to reduce our debt levelsover the coming months."
Petrobras is struggling under the competing goals of itscontrolling shareholder, the Brazilian government. As it pushesthe company to boost spending and investment to create jobs andbolster oil taxes, it has also prevented Petrobras from sellinggasoline and diesel at world market prices, a subsidy aimed atholding inflation in check.
With revenue and production stagnant, Petrobras has beenforced to increase borrowing to finance the company's $237billion five-year investment plan, the world's largest corporatespending program.
Total debt jumped 34 percent to 250.9 billion reais ($112.5billion) in the 12 months ended Sept. 31, and the company hasjust agreed to pay 40 percent of the nearly $100 billion neededto develop the giant Libra offshore oil area.
Moody's investors service cut the company's long-term debtrating this month, citing expectations that cash flow at thecompany will be negative for some years.
Foster assumed her post nearly two years ago with a promiseto reduce costs. Costs have climbed sharply, however, eatingaway at revenue, while declining output from old fields andsnags setting up new one have prevented sales from rising more.
Exploration expenses jumped 71 percent to 2.21 billionreais, driven by new production systems and the need to writeoff dry wells and areas that are not commercially viable.
General and administrative expenses rose 10 percent to 2.80billion reais, costs related to tax preparation and accountingrose 28 percent to 219 million reais, and sales expenses jumped13 percent.
"We have had little hope that operating results will improvethis year," said Lucas Brendler, oil and gas analyst with BancoGeração Futuro in Porto Alegre, Brazil, in an interview beforethe results were announced.
Those costs expanded much faster than sales, which rose just5.3 percent from a year earlier to 77.7 billion reais, justshort of the average analyst estimate of 78.7 billion reais.
The higher costs resulted in a weaker than expected resultfor earnings before interest, taxes, depreciation andamortization, or EBITDA, a measure of the company's ability togenerate profit from operations.
EBITDA fell 8.9 percent to 13.09 billion reais in thequarter, short of the 15.6 billion real average estimate.
Output rose in September and July, but Foster has saidinvestors should not expect major increases until 2015.
The fuel subsidies imposed by the government have causedlosses in the refining division to mount to more than 12 billionreais this year, the statement said.
Those losses come in large part because gasoline sold byPetrobras in Brazil's markets is 6.5 percent cheaper than worldprices, and diesel, the country's most used fuel, is 19 percentlower, Foster told the GloboNews 24-hour TV network on Thursday.
That price does not include the cost of tanker freight andimport taxes. Net fuel and crude imports soared 57 percentduring the quarter to 425,000 barrels a day in the quarter fromthe year-earlier period.
That increase has been driven in recent quarters by areduction of the amount of ethanol in gasoline blends, boostingdemand for gasoline while crude and fuel exports fall.
Not only does Petrobras sell imported fuel at a loss becauseof the subsidies, it forgoes additional profit from domesticoperations as it uses world prices to account for its domesticcrude oil production.
The gap between world and local prices exists despite aseries of price increases in the past 16 months. The increasewas largely swallowed up by a decline in the value of Brazil'scurrency. The real was 11.4 percent weaker in the thirdquarter than a year before and 9.8 percent weaker than in thesecond quarter.
Exchange-rate losses would have hurt weak third-quarterprofit more had the company not used new accounting rules onimports to strip up to 70 percent of the exchange-rate impactfrom quarterly results and spread it over several years. The newrules were first used in the second quarter.
Without that change, profit would have been 824 millionreais lower, according to Petrobras.
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