May 13 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, rose in Sao Paulo trading after posting a larger increase in first-quarter profit than analysts estimated on production growth and cost reductions.

Petrobras, as the Rio de Janeiro-based company is known, rose 1.20 reais, or 2.6 percent, to 46.95 reais in Sao Paulo. The stock has 20 buy ratings and no hold or sell recommendations from analysts.

Consolidated net income climbed to 6.93 billion reais ($4.2 billion), or 79 centavos a share, from 4.13 billion reais, or 47 centavos, a year earlier, Petrobras said after the close of regular trading yesterday. Net sales rose 21 percent to 46.9 billion reais.

At 68 percent, the profit increase was the biggest for Petrobras since the 2005 fourth quarter. It comes as the company ramps up capital spending to tap offshore fields including the Western Hemisphere's biggest petroleum discovery in three decades. Cost cutting offset increased rents for drilling equipment, Chief Financial Officer Almir Barbassa said yesterday in an interview. Operating costs fell 11 percent, he said.

``This is a surprising and very good result,'' said Luiz Otavio Broad, an analyst at Agora CTVM, Brazil's largest brokerage, in Rio de Janeiro. ``The result is largely operational, and the stock should open well.''

Broad said he expected net income of 5.7 billion reais on sales of 46.6 billion reais. He has a ``buy'' recommendation on Petrobras shares and owns none.

Exceeding Expectations

Marcos Paulo Fernandes, an analyst with Fator Corretora in Sao Paulo, said he expected net income of 6.04 billion reais on sales of 46.9 billion.

``I'm very impressed with our operational results,'' Barbassa said. ``We have worked seriously to improve the performance of the company, and we expect to be able to maintain that performance and even improve it in coming months.''

Oil and natural-gas output climbed 2 percent from a year earlier to the equivalent of 2.35 million barrels of crude a day, Petrobras said. Domestic sales rose 8 percent as Brazil's economy grew at the fastest rate in almost a decade, driving up demand for diesel and gasoline.

Profit climbed even as the company kept prices of diesel and gasoline steady in the Brazilian market during the first quarter. Petrobras raised its domestic prices by 10 percent for gasoline and 15 percent for diesel, the first increases for the fuels in two and a half years, on April 30.

Higher Margins

The price increases should mean higher profit margins in the current quarter, said Lucas Mattioni Brendler, an oil analyst with Geracao Futuro, a Porto Alegre, Brazil, asset manager. He said first-quarter net income exceeded his estimate by 1 billion reais.

Brendler helps manage 6.5 billion reais of assets at Geracao Futuro, where Petrobras is one of the largest holdings.

Petrobras have jumped 34 percent since the company said in November that its Tupi offshore field may hold 8 billion barrels of recoverable oil. In that same period, the Standard & Poor's index of major U.S. oil companies climbed 7.7 percent.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net.

Last Updated: May 13, 2008 16:15 EDT