Rosneft's Second-Quarter Net Exceeds Lukoil's as Output Expands

By Greg Walters

Aug. 29 (Bloomberg) -- OAO Rosneft, Russia's biggest crude oil producer, earned more than domestic rival OAO Lukoil in the second quarter by raising output and integrating assets bought from bankrupt OAO Yukos Oil Co.

Rosneft said net income more than doubled to $4.31 billion, beating analysts' forecasts. Lukoil, the country's second- biggest oil producer, said profit rose 64 percent to $4.13 billion, missing estimates.

State-run Rosneft went from being a second-tier oil company to Russia's leading producer after buying up assets belonging to Yukos, which collapsed in 2006 under back-tax claims of more than $30 billion. Lukoil has struggled against declining crude output in western Siberia.

``Rosneft will probably eclipse Lukoil,'' said Ronald Smith, chief strategist at Moscow-based Alfa Bank. ``It has a better long-term profile, and it has younger, more-productive fields.''

Lukoil fell 51.03 rubles, or 2.7 percent, on Moscow's Micex Stock Exchange to 1,829.60 rubles at 4:04 p.m. local time. UBS AG cut its price estimate today on Lukoil shares by 2.5 percent to $94.20 (2,315 rubles), citing ``cost inflation across the board.'' Rosneft rose 3.53 rubles, or 1.7 percent, to 209.50 rubles.

Rosneft also outpaced Lukoil in terms of earnings before interest, taxation, depreciation and amortization, or Ebitda, a measure of underlying profitability. Rosneft's Ebitda rose 97 percent to $7.05 billion, as Lukoil's rose 59.2 percent to $6.24 billion.

Cost Control

``The cost discipline showed by Lukoil was not very impressive in the second quarter.''said Igor Kurinnyy, oil and gas analyst at ING Bank Groep, by phone from London. ``In my personal opinion, Rosneft's management is slightly more efficient than Lukoil's management.''

Both companies benefited from export blend Urals crude averaging $117.64 a barrel in the period, up 80 percent from a year earlier, according to data compiled by Bloomberg.

Rosneft borrowed $22 billion to buy units and refineries at auctions after former Yukos Chief Executive Officer Mikhail Khodorkovsky was jailed for tax evasion and fraud. The company agreed to sell half of production unit Tomskneft to OAO Gazprom Neft in December.

Rosneft reported net income of $7.66 billion in the second quarter of last year after receiving one-time payments from the sale of assets by Yukos, dismantled in President Vladimir Putin's second term after getting more than $30 billion of back-tax claims. Adjusted to exclude the Yukos payments, profit was $1.7 billion during the period, Rosneft said today. Rosneft was Yukos's second-biggest creditor.

Lukoil Hedges

Lukoil's cost of purchased oil, gas and products jumped 77 percent in the second quarter to $12.5 billion as prices rose. That included a loss of $621 million from hedging, compared with $45 million a year earlier. Selling, general and administrative expenses increased 22 percent in the first half of the year.

Lukoil said profits were hurt by operating expenses that rose by 26.2 percent in the first half as oil extraction and refining became more expensive and the ruble appreciated.

To contact the reporter on this story: Greg Walters in Moscow gwalters1@bloomberg.net