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. Last Updated: 07/27/2016

LUKoil’s Q2 Profit Beats Expectations

VedomostiLUKoil posted a second-quarter gain of $2.32 billion, still down from $4.13 billion in the same period last year.

LUKoil, 20 percent owned by ConocoPhillips, on Friday beat profit forecasts in its second quarter as it took advantage of tax breaks and played a winning hand in the oil market.

LUKoil, one of the few Russian oil companies to boost output in the second quarter, said its net profit for the period fell 44 percent to $2.32 billion, from $4.13 billion in the previous year, because of plummeting oil prices.

A poll of 10 analysts gave an average forecast of $1.8 billion.

The bottom line was still 2.5 times higher than $905 billion in the first quarter, when the energy sector suffered an even harsher blow from the fall in oil prices.

LUKoil’s top rival, state-run Rosneft, is expected to show worse profitability than Russia’s second-largest producer when it reports results this week.

Analysts expect Rosneft to post a net profit of more than $1.7 billion in the second quarter, less than LUKoil in absolute terms even though Rosneft produces about 20 percent more crude.

LUKoil said an increase in production and trading had raised its first-half sales by 36 percent in terms of volumes. It attributed the increase in crude oil extraction to the start of production at the Yuzhnoye Khylchuyu oil field in August 2008.

LUKoil vice president Leonid Fedun told a news conference that the company was “disappointed” with the reserves of Yuzhnoye Khylchuyu, which is located some 2,000 kilometers northwest of Moscow. It is owned 30 percent by Conoco and 70 percent by LUKoil.

“The initial studies [for valuation of the reserves] were bigger than we had in the end, but this difference is not material,” he said. LUKoil has said the field has reserves of 500 million barrels of oil.

Fedun also complained that the state is not active enough in auctioning off new fields, which he said might lead to an oil output decline in the future.

Instead, he said LUKoil — which owns 49 percent of Italian refiner ERG’s Isab di Priolo refinery and in June acquired a stake in a Dutch refinery from France’s Total —was set to increase its foreign operations.

Fedun said the company might increase investments in its foreign projects in the fourth quarter. He did not elaborate.

Svetlana Grizan, analyst at VTB Capital, said the company managed to save $300 million from tax breaks in the Timan-Pechora oil province, where it was exempt from paying the mineral extraction tax.

Denis Borisov, an analyst at Solid brokerage, said LUKoil also benefited from a lower income tax. “For the first quarter the rate was 26 percent, but for the second quarter it fell to 22 percent,” he said.

LUKoil shares finished 3.8 percent higher on the MICEX exchange, outperforming the broader index, which rose 2.9 percent.

The company said its earnings before interest, taxation, depreciation and amortization shrank 34 percent in the second quarter to $4.12 billion, while analysts projected a deeper fall to $3.53 billion.