Rosneft, LUKoil Boost Q2 Results

Russia's top two oil companies reported their biggest-ever quarterly profits on near-record oil prices, with state-controlled Rosneft's outpacing those of LUKoil, which posted a hedging loss.

Both companies said Friday that they would go on to post record profits for this year, even though oil prices have come under pressure and the ruble has risen against the dollar this year.

"We are now paying higher export duties because of the lag effect and selling at lower prices because global oil prices are falling, but we still expect a record year," Rosneft vice president for finance Peter O'Brien said by telephone.

Rosneft, the country's top oil producer, reported a better-than-expected net profit, which jumped 153.2 percent versus the same period of the previous year, and a 96 percent increase in revenues.

Results of Rosneft's closest peer, LUKoil, showed a 63.9 percent rise in net income and 58 percent increase in sales, although LUKoil undershot analyst expectations by half a billion dollars because of the hedging loss.

LUKoil vice-president Leonid Fedun told a briefing that he expected better financial results in the third quarter because of more efficient hedging operations, and he also said 2008 would be a record year for the company.

Rosneft posted net profit of $4.31 billion, revenues of $21.13 billion and earnings before interest, taxation, depreciation and amortization of $7.05 billion.

LUKoil, in which U.S. oil major ConocoPhillips owns 20 percent, said second-quarter net profit was $4.13 billion, sales $31.94 billion and EBITDA $6.24 billion.

Soaring oil prices had meant strong results were well flagged in the market, and analysts said investors would focus on costs to judge whether the oil companies were winning in the national battle against rampant inflation.

"On the costs side, which is increasingly important for everybody, particularly with the inflation we are having and until recently currency appreciation, we have done well. Production cost per barrel [is] barely up in nominal terms despite more than 20 percent ruble appreciation," he said.

LUKoil continued to fare worse in that fight, analysts said. In terms of EBITDA, Rosneft outstripped its rival for the first time this quarter.

"LUKoil's second-quarter selling, general and administrative expenses and transportation costs increased more than we expected," said Igor Kurinny from ING in a research note, adding that he believed LUKoil could have saved about $300 million in the second quarter by exercising better cost controls.

Pavel Sorokin from UniCredit Aton said the fact Rosneft's operational cash flow rose 13 percent and stood higher than capital expenditure was a good sign, as it showed that the company had free cash for future needs.

The heavily indebted company, which borrowed to buy Yuganskneftegaz, the former production subsidiary of now-bankrupted Yukos, also refinanced a large portion of its debt and reduced its interest expenditure by 2.5 percent, Sorokin said.

ING said Rosneft's operating cash flow, which amounted to $4.87 billion, was 37 percent above its forecast, while capital expenditure of $2.5 billion was largely in line.