NESTE OIL'S INTERIM REPORT FOR JANUARY-JUNE 2008

The second quarter in brief:

- Sales of EUR 4,420 million (Q2/07: 3,207 million)

- Comparable operating profit of EUR 181 million (Q2/07: 225 million)

- Operating profit of EUR 290 million (Q2/07: 314 million)

- Earnings per share of EUR 0.83 (Q2/07: 0.88)

- Cash flow from operations of EUR 314 million (Q2/07: 460 million)

- Net debt of EUR 1,017 million (Q2/07: 776 million)

- Total refining margin of USD 12.38 /bbl (Q2/07: 11.92), a new quarterly record

President & CEO Risto Rinne:

 

"The petroleum product market proved a polarized one, with gasoline performing poorly and diesel strongly. Our refineries are geared towards diesel production, and this saw us reporting our highest quarterly total refining margin ever. Unfortunately the availability of our new diesel line, which was down for most of the quarter, was disappointing as the line has not yet delivered as it should and can."

 

"We made two major investment decisions that will take our strategy forward during the second quarter. We are building a world-scale NExBTL renewable diesel plant in Rotterdam, similar to the one under construction in Singapore; and in Bahrain we are investing in a large, top-tier base oil plant together with local partners."

 

Further information:

 

Risto Rinne, President & CEO, tel. +358 10 458 4990

Petri Pentti, CFO, tel. +358 10 458 4490

 

A press conference in Finnish on the second-quarter results for 2008 will be held today, 31 July 2008, at 11:30 am EET in the Mirror Room at Hotel Kämp, Pohjoisesplanadi 29, Helsinki. www.nesteoil.com will feature English versions of the presentation materials.

 

An international conference call for investors and analysts will be held on the same day at 3:00 pm Finland / 1:00 pm London / 8:00 am New York. The call-in numbers are as follows: Europe: +44 (0)20 3023 4426, US: +1 866 966 5335. Use the password: Neste Oil. A webcast of the call can be found at http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=189806&eventID=1899772. An instant replay will be available for one week at +44 (0)20 8196 1998 for Europe and +1 866 583 1035 for the US, using access code 725434.

 

Unaudited

 

Figures in parentheses refer to the same period in previous year, unless otherwise stated.

 

 

* Comparable operating profit is calculated by excluding inventory gains/losses, gains/losses from sales of fixed assets, and unrealized changes in the fair value of oil and freight derivative contracts from the reported operating profit.

The Group's sales increased by 38% to EUR 4,420 million (3,207 million) in the second quarter, largely due to higher petroleum product prices.

 

The second-quarter operating profit totaled EUR 290 million (314 million) and includes an inventory gain of EUR 119 million (55 million).

 

The Group's comparable operating profit was EUR 181 million (225 million) in the second quarter. The increase in total refining margin, as well as strong renewable fuels sales margin and crude freight rates, were offset by the negative impacts of the weak US dollar and reduced sales margins at the Specialty Products Division. In addition, maintenance costs and depreciation were higher compared to the same quarter in 2007. The full potential of strong diesel margins was missed, however, because the new diesel production line at the Porvoo refinery was down for almost the whole quarter as a result of a fire in April.

 

During the second quarter the comparable operating profit of Oil Refining was EUR 133 million (168 million), Renewable Fuels EUR 13 million (-5 million), Specialty Products EUR 19 million (41 million), Oil Retail EUR 11 million (17 million), and Shipping EUR 20 million (12 million).

The Group's profit before taxes was EUR 284 million (304 million), and net profit for the period was EUR 213 million (227 million). Earnings per share were EUR 0.83 (0.88).

Sales of the Neste Oil Group totaled EUR 7,717 million in the January-June period, compared to EUR 5,664 million in the same period in 2007.

 

The Group's six-month operating profit totaled EUR 494 million (478 million). Inventory gains reached EUR 194 million during the period (84 million).

 

The Group's comparable operating profit for the period was EUR 300 million (383 million). Higher total refining margin and good sales margin on renewable fuels had a positive impact, whereas the weak US dollar and lower margins at Specialty Products had a negative impact on the comparable operating profit.

 

The six-month comparable operating profit of Oil Refining was EUR 230 million (274 million), Renewable Fuels EUR 15 million (-10 million), Specialty Products EUR 27 million (73 million), Oil Retail EUR 20 million (28 million), and Shipping EUR 29 million (33 million).

The Group's profit before taxes was EUR 475 million (465 million), and net profit for the period was EUR 356 million (345 million). Earnings per share were EUR 1.38 (1.34).

Given the capital-intensive nature of its business, Neste Oil uses return on average capital employed after tax (ROACE) as its primary financial indicator. As of the end of June, the rolling twelve-month ROACE was 12.7%, which is below the target of at least 15% over the cycle (financial period 2007: 15.5%).

 

 

Investments during the first six months totaled EUR 192 million (177 million), of which Oil Refining accounted for EUR 68 million, Renewable Fuels EUR 77 million, Specialty Products EUR 3 million, Oil Retail EUR 23 million, and Shipping EUR 1 million. Capital investments in the Other segment totaled EUR 20 million.

Depreciation in January-June period was EUR 112 million (84 million).

 

Interest-bearing net debt totaled EUR 1,017 million at the end of June (31 Dec 2007: 755 million). This increase was mainly caused by higher net working capital due to increased crude oil and petroleum product prices. Net financial expenses between January and June were EUR 19 million (13 million).

 

The average interest rate of borrowings at the end of June was 4.5%, and the average maturity 4.4 years.

 

Net cash from operating activities between January and June was EUR 201 million (353 million).

 

The equity-to-assets ratio was 43.5% (31 Dec 2007: 49.9%), the gearing ratio 40.5% (31 Dec 2007: 31.1%), and the leverage ratio 28.8% (31 Dec 2007: 23.7%).

 

Cash and cash equivalents and committed, unutilized credit facilities amounted to EUR 1,246 million at the end of June (31 Dec 2007: 1,492 million).

 

In accordance with its hedging policy, Neste Oil has hedged the majority of its net foreign currency exposure for the next 12 months using mainly forward contracts and currency options. The most important hedged currency is the US dollar.

 

Crude oil price continued to increase in the second quarter and Brent Dated reached a new record of USD 139.10/bbl in June, averaging USD 121.38/bbl (68.76) in the quarter. Although the supply/demand balance was not tight, crude oil inventories decreased as a consequence of high crude prices and the unfavorable market structure. Financial market problems, the weakening US dollar, and poor returns from bonds and equities made investors move their funds to commodities, including oil, in increasing volumes. The price differential between Brent Dated and Urals crude widened to USD -4.44/bbl (-3.45) due to low fuel oil margins and increased supply of heavier crude.

 

Reference refining margins were lower compared to the same quarter in 2007. A strong distillate market resulted in higher margins compared to the first quarter, while margins for other products were weak. The international reference refining margin in North West Europe, IEA Brent Cracking, averaged USD 5.51 /bbl (7.90).

 

Middle distillates, diesel in particular, were the strongest performer during the quarter, as refinery maintenance and reduced runs at simple refineries reduced overall supply and inventories continued to decline. Demand for diesel as a transportation fuel continued to increase and margins were further supported by demand for the fuel in energy generation in China and South America.

 

US gasoline demand was lower than a year ago, as record-high pump prices and the slowing domestic economy started to impact consumer behavior. Gasoline margins were very low, despite decreasing inventories. Current prices are encouraging an increased use of ethanol blending, putting further pressure on margins.

 

Fuel oil margins were extremely weak, due to large Russian export volumes.

 

Demand and margins for high-quality NExBTL renewable diesel have remained good.

High oil prices put pressure on retail margins and volumes, especially in respect of gasoline. The continued growing popularity of diesel cars has kept diesel demand healthy.

 

The crude freight market was very strong in the second quarter due to temporary tightness in global capacity. North Sea crude freight rates were 81% and Baltic freight rates 75% higher compared to the second quarter of 2007.

 

Key drivers

Sales from in-house production (in 1,000 tons and % of total)

 

 

Sales from in-house production by market area (in 1,000 tons and % of total)

 

Diesel sales were little lower compared to the second quarter of 2007, due to problems with the new diesel line and other maintenance at Porvoo. Gasoline sales were higher year-on-year, because of clearance of the company's gasoline inventories.

 

Neste Oil refined 3.6 million tons (3.6 million) of crude oil and feedstocks at its refineries in the second quarter, of which 2.9 million tons (2.9 million) at Porvoo and 0.7 million tons (0.7 million) at Naantali. The Porvoo refinery operated at a crude distillation capacity utilization rate of 89% (96%) during the quarter, while Naantali reached 96% (95%) capacity utilization.

The proportion of Russian Export Blend in Neste Oil's total refinery input was 54% (43%) in the second quarter.

Neste Oil's businesses are grouped into six segments: Oil Refining, Renewable Fuels, Specialty Products, Oil Retail, Shipping, and Other.

Oil Refining posted an operating profit of EUR 231 million (246 million) and a comparable operating profit of EUR 133 million (168 million).

 

Neste Oil's total refining margin reached a new quarterly record of USD 12.38 /bbl (11.92). In euros, however, the total refining margin was lower than a year earlier. The IEA Brent Cracking reference margin weakened to USD 5.51 /bbl (7.90). This was mainly thanks to a strong diesel market and was supported by a more favorable differential between Urals and Brent crude, as well as good margins for low vapor pressure gasoline sold to the US. Higher variable costs, such as energy, put pressure on the total refining margin.

 

The increase in refining margin was not enough to compensate for the negative impact of the weaker US dollar, maintenance costs, and trading activities.

 

Oil Refining's rolling 12-month comparable return on net assets at the end of June was 19.5%.

Renewable Fuels posted an operating profit of EUR 12 million (-4 million) and a comparable operating profit of EUR 13 million (-5 million) in the second quarter.

 

The increase was caused by the first production plant at Porvoo and healthy margins for NExBTL renewable diesel. Project and development costs had a negative impact on the segment's results.

Renewable Fuels' rolling 12-month comparable return on net assets at the end of June was
8.0%.

 

 

Specialty Products posted an operating profit of EUR 28 million (47 million) and a comparable operating profit of EUR 19 million (41 million) in the second quarter.

 

All businesses in the segment showed lower profitability compared to the second quarter of 2007. Base oil margins were under pressure due to the steady increase seen in feedstock prices. Sales volumes and margins in respect of gasoline components were lower compared to the very strong second quarter in 2007. Nynas Petroleum suffered from high crude prices.

 

Specialty Products' rolling 12-month comparable return on net assets at the end of June was 18.0%.

 

*includes both station and terminal sales

 

Oil Retail recorded an operating profit of EUR 11 million (18 million) and a comparable operating profit of EUR 11 million (17 million) in the second quarter. These figures include a EUR 4 million write-down on business partner-related receivables in Baltic Rim terminal operations.

 

Neste Oil's domestic market share in gasoline increased and sales volumes grew, despite a reduction in overall demand for gasoline in Finland. Diesel demand, however, has increased, which resulted in a 9% growth in the company's diesel sales. Neste Green diesel fuel was launched in Greater Helsinki and the surrounding area in May. This fuel, which includes at least 10% of the company's NExBTL renewable diesel component, has proven to be a success.

 

Conversion of Finnish stations to a unified Neste Oil brand is under way and 88 stations had been revamped as of the end of June. A total of 275 stations are to be revamped in 2008.  

 

Sales volumes in Russia increased somewhat, but margins were lower compared to a very strong second quarter in 2007. The economic slowdown in Estonia and Latvia has resulted in lower demand for gasoline, but margins have remained largely unchanged.

 

At the end of the quarter, Neste Oil had 893 (896) outlets in Finland and 277 (248) around the Baltic Rim.

 

Oil Retail's rolling 12-month comparable return on net assets at the end of June was 14.1%.

Shipping recorded an operating profit of EUR 23 million (16 million) and a comparable operating profit of EUR 20 million (12 million).

 

This stronger profitability was driven by unseasonably high crude freight rates and an excellent fleet utilization rate. This positive development was undermined by increases in bunker prices and port charges and the weak US dollar. 

 

Shipping's rolling 12-month comparable return on net assets at the end of June was 8.1%.

 

A total of 111,427,885 Neste Oil shares were traded in the second quarter, totaling EUR 2.2 billion. The share price reached EUR 23.29 at its highest and EUR 17.81 at its lowest, and closed the quarter at EUR 18.72, giving the company a market capitalization of EUR 4.8 billion as of 30 June 2008. An average of 1.8 million shares were traded daily, equivalent to 0.7% of the shares outstanding.

 

Neste Oil's share capital registered with the Company Register as of 30 June 2008 totaled EUR 40 million, and the total number of shares outstanding is 256,403,686. The company does not hold any of its own shares, and the Board of Directors has no authorization to buy back company shares or to issue convertible bonds, share options, or new shares.

 

At the end of June, the Finnish state owned 50.1% of outstanding shares, foreign institutions 24.7%, Finnish institutions 17.1%, and Finnish households 8.0%.

 

 

 

As announced in the beginning of April, the disagreement that has arisen in the final financial settlement for the mechanical installation works on the new diesel line in Porvoo is being processed against the main constructor, the YIT Group, at the court of arbitration.

 

 

 

Neste Oil employed an average of 5,099 (4,761) employees in the second quarter. At the end of June, Neste Oil had 5,477 employees (30 June 2007: 4,956).

 

 

The indicator for safety performance used by Neste Oil - total recordable injury frequency (TRIF, number of cases per million hours worked) for all work done for the company, combining the company's own personnel and contractors - stood at 6.3 (5.7) at the end of June 2008. The target for current year is below 5.

 

The cumulative number of lost workday injuries was 29 at the end June, with the frequency (LWIF) of 3.6. The target is below 3.

 

Neste Oil has continued to implement its clean fuel strategy by making investment decisions to increase production of renewable diesel and other high-quality products, such as base oils.

NExBTL renewable diesel

 

The cornerstone of Neste Oil's growth strategy is the company's proprietary NExBTL technology, which produces a premium-quality renewable diesel fuel that clearly outperforms both existing biodiesel (FAME) products and crude oil-based diesel products currently on the market. NExBTL renewable diesel can be produced from almost any vegetable oil or animal fat.

 

A second NExBTL plant is under construction at Porvoo and is scheduled to be commissioned in 2009. The capital cost of the second unit is estimated at more than EUR 100 million. The plant will have the same design capacity, 170,000 t/a, as the first plant currently operating at the Porvoo refinery. Construction of an 800,000 t/a NExBTL renewable diesel plant in Singapore started in March; this has a capital cost budgeted at EUR 550 million and is expected to be completed by the end of 2010.

 

In June, Neste Oil announced a decision to build another 800,000 t/a plant in Rotterdam, in the Netherlands. The estimated cost of the plant is EUR 670 million, and it is expected to come on stream in 2011.

 

An update of biofuel legislation is under way in the European Union, and a plenary vote of the EU Parliament on the new Renewable Energy Directive is expected to take place in September.

 

The company will continue to be active in R&D in the renewable fuels area, and aims to switch completely to non-food feedstocks, such as wood residue and new type of non-edible oils, by 2020. The Neste Oil and Stora Enso joint program to develop wood residue gasification and gas purification technology for producing of renewable diesel feedstock is progressing according to plan.

 

Base oils

 

Neste Oil, Bahrain's Oil & Gas Holding Company (OGHC) and the Bahrain Petroleum Company (Bapco) announced their decision in June to build a high-quality lubricant base oils plant in Bahrain. The plant will have an annual capacity of 400,000 tons of VHVI (Very High Viscosity Index) base oil for use in blending top-tier lubricants. It will be one of the world's largest VHVI base oil plants when it begins production, which is scheduled for the end of 2011. The total investment cost of the project is estimated to be between EUR 250 and 300 million, of which Neste Oil's share is 45%.

 

 

Refinery projects

 

In June, Neste Oil decided to build a new isomerization unit, costing approximately EUR 80 million, at the Porvoo refinery. The new unit will be capable of processing 600,000 t/a of existing gasoline fractions into higher-value, premium-quality gasoline, and will increase the refinery's total gasoline output by 200,000 t/a. Construction of the new unit will begin in 2009, and it is scheduled to come on stream at the beginning of 2011.

 

The company continues to review opportunities for investing in new conversion capacity at the Naantali refinery to increase diesel production.

 

 

 

The oil market continues to be very volatile. Oil refiners are exposed to a variety of political

and economic trends and events, as well as natural phenomena, that affect the short- and long-term supply of and demand for the products that they produce and sell.

 

The largest uncertainties during the remainder of 2008 are related to high crude oil price and the economic slowdown in the US, which are likely to have an impact on the demand for petroleum products and gasoline in particular. Sudden and unplanned outages at Neste Oil's production units or facilities also represent a short-term risk.

 

Over the longer term, access to funding and rising capital costs as well as challenges in procuring and developing new competitive and reasonably priced raw materials, may impact the company's growth plans.

 

The key market drivers for Neste Oil's financial performance are international refining margins,

the price differential between Russian Export Blend (REB) and Brent crude, and the USD/EUR

exchange rate.

 

For more detailed information on Neste Oil's risks and risk management, please refer to the

company's Annual Report and Financial Statements for 2007.

 

 

In the US and Europe gasoline consumption has declined and an increasing proportion of demand is being met by ethanol. This is expected to continue and keep gasoline margins low and capacity utilization at gasoline-focused refineries modest. Simple refineries are suffering from poor margins on gasoline and heavy fuel oil, and are reducing output as a result. This is also cutting diesel production volumes.

 

The diesel supply/demand balance is expected to remain tight and margins strong for the foreseeable future benefiting refiners that have high diesel yield like Neste Oil.

 

The company's most recent diesel capacity addition, the new diesel line in Porvoo, has suffered from operational constraints following the fire in April. To eliminate these, the unit will be shut down for maintenance for about one and a half months beginning in the second half of August.

 

Margins on base oils are expected to recover when crude oil prices stabilize. Margins on gasoline components are expected to remain lower than previous year due to weak gasoline market.

 

Maintenance and technical improvements will be carried out at the NExBTL renewable diesel plant in Porvoo during the second half.

 

Neste Oil's retail volumes are expected to increase in the second half of 2008 compared to 2007, although demand is likely to decline due to high oil prices and the economic slowdown in Baltic Rim countries.

 

Shipping's freight rates have continued to be unseasonably high in July.

 

The weak US dollar will have a negative impact on the Group's profit in the second half.

 

The Group's capital expenditure in estimated to be approximately 600 million in 2008.

 

Neste Oil will publish its third-quarter results on 24 October 2008 at approximately 9:00 a.m. EET.

Espoo, 30 July 2008

Neste Oil Corporation

Board of Directors

 

 

The preceding information contains, or may be deemed to contain, "forward-looking statements". These statements relate to future events or our future financial performance, including, but not limited to, strategic plans, potential growth, planned operational changes, expected capital expenditures, future cash sources and requirements, liquidity and cost savings that involve known and unknown risks, uncertainties, and other factors that may cause Neste Oil Corporation's or its businesses' actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements.  In some cases, such forward-looking statements can be identified by terminology such as "may,"  "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," or "continue," or the negative of those terms or other comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Future results may vary from the results expressed in, or implied by, the forward-looking statements, possibly to a material degree. All forward-looking statements made in this report are based on information presently available to management and Neste Oil Corporation assumes no obligation to update any forward-looking statements. Nothing in this report constitutes investment advice and this report shall not constitute an offer to sell or the solicitation of an offer to buy any securities or otherwise to engage in any investment activity.