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. Last Updated: 07/27/2016

LUKoil at Capacity as Profits Soar 61%

LUKoil, Russia's biggest oil producer, said second-quarter profit jumped 61 percent as prices for crude surged and the company cut costs.

Net income rose to $1.41 billion, or $1.71 per share, from $877 million, or $1.06, a year earlier, LUKoil said Tuesday. Sales rose 70 percent to $13.6 billion.

LUKoil, which pumps one-fifth of Russia's crude, is exporting more as the price of crude soars. The company cut costs to bolster profits after the government raised taxes on oil companies.

"LUKoil showed it can shift focus between exporting crude oil and exporting refined products to maximize profit under the current tax regime," said Zina Psiola, who manages $250 million in Russian stocks at Clariden Bank in Zurich and owns LUKoil shares. Russia's tax policy may have the biggest influence on future earnings, she said.

LUKoil, which owns four oil refineries in Russia and three outside the country, is processing more crude after export duties made product exports more profitable than crude exports.

The company is operating its refineries at "almost'' full capacity to boost fuel supply after prices rose to a record, Valery Golovushkin, vice-president for supply and trading, said after attending an industry event in Singapore. "The pipelines are full, and all the refineries are at full capacity," he said.

To offset rising taxes, LUKoil is looking at expansion abroad. It may bid for a stake in Mazeikiu Nafta, a Lithuanian refinery, with ConocoPhillips, LUKoil deputy CEO Leonid Fedun said Tuesday.

ConocoPhillips paid $2 billion last year to buy 7.6 percent of LUKoil from the Russian government. Houston-based ConocoPhillips raised its LUKoil stake to 14.5 percent as of Tuesday, Fedun said.

LUKoil may also buy the half that it does not already own in Turgai Petroleum, a joint venture in Kazakhstan, Fedun said. LUKoil has first rights to the stake, he said.

LUKoil is also looking to expand its quest for global refining and downstream assets into Asia to capitalize on that region's growing fuel demand, said Golovushkin. "We are ready to look for projects to increase refining," he said.

LUKoil already has fuel-blending operations in the United Arab Emirates and Singapore, although its only refineries outside Russia are in Ukraine and Eastern Europe.

The company said earlier this year that it planned to invest $2.6 billion over the next decade on developing its refining and marketing, although the bulk of this is expected to go toward modernizing its refineries to increase output and fuel quality.

Refiners have seen record profits in the past year as oil product prices soar amid tightly stretched global capacity, although this has raised asset prices and put LUKoil off from buying downstream assets in Europe and in the United States.

Golovushkin said the lack of infrastructure and high shipping costs were holding back greater exports to Asia, though slated pipeline projects would boost crude shipments to China, whose soaring demand in 2004 turned it into the world's second-largest oil consumer.

(Bloomberg, Reuters)