Nov. 12 (Bloomberg) -- Petroleo Brasileiro SA fell the most in a decade in Sao Paulo trading after Credit Suisse Group cut its stock recommendation for the Brazilian state-controlled oil company to ``neutral'' and energy prices slid to a 21-month low.

``We are becoming increasingly concerned with the company's deteriorating cost structure and earnings outlook'' with oil prices at $60 a barrel, analyst Emerson Leite wrote in a note.

The preferred shares of Petrobras, as the oil company is known, sank 14 percent to 20.62 reais, its steepest decline since 1998. Petrobras's losses dragged down Brazil's Bovespa index, which dropped 7.8 percent. The American depositary receipts tumbled 15 percent to $21.92 at 3:48 p.m. in New York.

Falling oil prices and the global credit crisis are putting pressure on Petrobras to generate more cash even as the company reported its biggest-ever quarterly profit yesterday.

``We are seeing not only lower oil prices but higher costs and they are not being very well explained,'' said Carlos Eduardo Ramos, portfolio manager at ARX Capital Management Ltd., which manages the equivalent of $2.58 billion in Rio de Janeiro. ``The outlook for the coming quarters is not very good.''

Crude plunged 5.3 percent to $56.16 on forecasts that a report will show U.S. crude inventories grew last week as a slower global economy erodes demand. Prices have tumbled 62 percent since reaching a record $147.27 on July 11.

``While we see value on a normalized oil price of $75 to $100 a barrel, we believe the market will not pay for it until reasonable visibility that oil will reach these levels again reemerges,'' wrote Leite, the second-ranked Latin American oil analyst according to Institutional Investor magazine. He previously had an ``outperform'' rating on the shares.

Focus on Cash

Plunging crude prices and tighter credit make it imperative that Petrobras, which plans to spend $112 billion to develop oil reserves in the 2008-2012 period, focus investments on projects that produce as much cash as possible, Chief Financial Officer Almir Barbassa told reporters after announcing third-quarter results yesterday.

Petrobras reported third-quarter net income of 10.9 billion reais ($4.89 billion), or 1.24 reais per share, compared with 5.53 billion reais, or 63 centavos a share, a year earlier. It was the largest quarterly profit in its history.

Ramos, whose company also owns shares in Petrobras, said that refinery margins may fall by 25 percent in the coming months and that while he thinks the company is a good long-term investment because of its large and growing reserves, it's going to need to work harder to cut costs.

Cash Position Drops

Heavy investments reduced the company's cash position 18 percent to 10.8 billion reais on Sept. 30 from 13.1 billion reais at the end of 2007, according to the company's Web site. Total cash, a measure of the company's ability to finance its investments from operations, has declined 61 percent since the beginning of 2007.

As part of its efforts to generate more cash for investment, Petrobras will move ahead with efforts to begin commercial output in its Tupi field in 2010, Barbassa said. With an estimated 5 billion to 8 billion barrels of oil, Tupi, off the coast of Rio de Janeiro, is the largest oil discovery in the Americas since 1976.

Separately, Brazil's energy agency said Petrobras discovered oil in its Marlim Sul field in the offshore Campos Basin. The discovery announcement did not indicate if the oil found can be commercially recovered.

Analyst Cut

Leite cut his share-price forecast for Petrobras's ADRs to $30 from $48. He has had an ``outperform'' rating on the stock since Feb. 2006.

``Petrobras has outperformed the Brazilian market from 2005 through 2007. In 2008, although the stock is down 56 percent, it has essentially performed in line with the market,'' Leite wrote. ``Looking ahead, we believe Petrobras is unlikely to beat the market, even if it rebounds from recent lows.''

To contact the reporters on this story: Fabio Alves in New York at falves3@bloomberg.net; Jeb Blount in Rio de Janeiro at jblount@bloomberg.net

Last Updated: November 12, 2008 15:49 EST