May 12 (Bloomberg) -- Petroleo Brasileiro SA Chief Financial Officer Almir Barbassa said the cost ‘overhang’ for oilfield equipment contracted when crude was higher, rising debt payments and falling oil prices led quarterly profit to slump.

Financial costs in the first quarter more than tripled to 849 million reais ($411 million) from 236 million reais a year earlier, after debt rose 9 percent to 70.3 billion reais, Barbassa told reporters in Rio de Janeiro late yesterday. Profit was also hurt by a 16 percent increase in operational costs to 10.2 billion reais and a drop in crude prices, he said.

Petrobras is seeking to trim costs for rigs, ships and other equipment needed to develop offshore fields after service providers took advantage of record oil prices last year to boost prices. The company’s debt is also increasing as Petrobras seeks to finance a five-year, $174.4 billion investment plan.

“We had more debt and thus higher interest cost,” Barbassa said. “Our operational costs are still being hurt by the overhang from last year.”

First-quarter consolidated net income declined to 5.82 billion reais, or 66 centavos a share, from 7.24 billion reais, or 83 centavos, a year earlier, the Rio de Janeiro-based company said yesterday. Three analysts surveyed by Bloomberg had forecast average profit of 5.71 billion reais.

Petrobras is seeking to bolster profit and cash generation after the average price of oil in the quarter fell 56 percent to $43.34 a barrel from $97.79 a year earlier. Declining profit comes as the company embarks on the world’s largest corporate investment plan. The $174.4 billion program requires the company to spend almost $100 million a day.

Oil’s Decline

“The best way to explain the quarter is the decline in the price of oil,” Gilberto de Souza, an oil and gas analyst with Banco Espirito Santo in Sao Paulo, said in an interview. “There is also the impact from lower sales volumes.”

Net sales fell to 42.6 billion reais from 46.8 billion a year earlier.

The company, which announced the Americas’ largest oilfield discovery in three decades in 2007, is tapping overseas partners to help fund the five-year investment plan. Petrobras’s growing reserves give it extra ability to borrow at a time when many oil companies are struggling to replace the oil they pump, according to Jorge Pinon, a former head of BP Plc’s operations in Latin America.

Crude Prices

Crude oil for June delivery rose 1 percent to $59.09 a barrel in New York today. Yesterday, oil dropped as much as 3.2 percent before settling at $58.50. Prices have fallen about $90 from their peak of $147.27 a barrel on July 11.

“A year ago prices were near their highest ever,” Barbassa told reporters. “This has had an impact.”

The company’s total oil and gas output rose 5.8 percent to 2.48 million barrels a day, while Brazilian production increased 6.7 percent to 2.26 million barrels, Petrobras said. The company boosted spending on exploration and production in the period by 52 percent to 7.12 billion reais.

The discovery of the Tupi offshore field in November 2007, which may hold as many as 8 billion barrels of oil, was the largest discovery in the Americas since Mexico’s Cantarell. Tupi and nearby fields in Brazil’s so-called pre-salt basin may almost double Petrobras’s oil reserves, the company said in January.

The company said April 7 it may reduce its $18.1 billion financing needs for this year if oil remains above $37 a barrel. If oil averages $46 a barrel this year, the company’s financing needs may be reduced by $4.5 billion, Petrobras said.

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

Last Updated: May 12, 2009 06:46 EDT