Neste Oil's Interim Report for January-September 2008

- Comparable operating profit increased and was EUR 199 million in the third quarter

The third quarter in brief:

- Strong comparable operating profit of EUR 199 million (Q3/07: 159 million)

- Operating profit of EUR 44 million (Q3/07: 180 million), depressed by an inventory loss of EUR 180 million

due to rapidly falling oil prices

- Cash flow from operations of EUR -175 million (Q3/07: -32 million) due to temporarily high receivables at

the end of the quarter

- Solid financial position; no major refinancing needs over the short or medium term, nor credit losses with

counterparty banks

- Total refining margin reached a new record of USD 13.54 /bbl (Q3/07: 10.20)

- Maintenance work on the Porvoo diesel production line 4 was carried out as planned and the line has been

operating normally since early October

Jarmo Honkamaa, Deputy CEO:

"We are satisfied with our strong results in what was a really exceptional environment in the third quarter. The oil market witnessed even higher-than-normal volatility, and crude oil prices dropped rapidly and significantly after rising for eight months. This was reflected in our IFRS operating profit for the quarter, which includes a large inventory loss."

 

"Our comparable operating profit, which best reflects the company's operational results, was among the highest in our history. This was largely thanks to our high total refining margin, supported by a strong diesel market, and another good quarterly result by Shipping." 

"Demand for middle distillates and diesel continues to be the main driver of refining margins. I am pleased to say that all our diesel production units are operating normally again after maintenance carried out at the Porvoo diesel line in August and September."

 

Further information:

Jarmo Honkamaa, Deputy CEO, tel. +358 10 458 4758

Risto Takkala, Interim CFO, tel. +358 10 458 4071

Investor Relations, tel. +358 10 458 5132

 

 

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=1995604. 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 third quarter of 2007, unless otherwise stated.

 

 

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

High oil prices boosted Neste Oil's sales to EUR 4,521 million in the third quarter, representing a 52% increase compared to the third quarter of 2007.

 

The comparable operating profit stood at EUR 199 million (159 million), driven by high total refining margin and strong profitability in Shipping. Exceptional items burdened the comparable operating profit by EUR 19 million. The USD/EUR exchange rate also impacted negatively.

 

During the third quarter, the comparable operating profit of Oil Refining was EUR 149 million (125 million), Renewable Fuels EUR -3 million (-6 million), Specialty Products EUR 29 million (34 million), Oil Retail EUR 7 million (21 million), and Shipping EUR 23 million (-1 million).

 

The Group's third-quarter operating profit was EUR 44 million (180 million), which includes an inventory loss of EUR 180 million due to a rapid fall in oil price.

 

The Group's profit before taxes was EUR 36 million (168 million), and net profit for the period was EUR 34 million (132 million), resulting in earnings per share of EUR 0.13 (0.52).

Sales of the Neste Oil Group totaled EUR 12,238 million between January and September, compared to EUR 8,642 million in the same period in 2007.

 

The Group's comparable operating profit for the period was EUR 499 million (542 million). This figure was supported by a high total refining margin, but its impact was muted by lower profitability at Specialty Products, the weak US dollar, and increased fixed costs.

 

The Group's nine-month operating profit totaled EUR 538 million (658 million). Inventory gains decreased to EUR 14 million during the period (120 million).

 

Oil Refining's nine-month comparable operating profit was EUR 379 million (399 million), Renewable Fuels' EUR 12 million (-16 million), Specialty Products' EUR 56 million (107 million), Oil Retail's EUR 27 million (49 million), and Shipping's EUR 52 million (32 million).

The Group's profit before taxes was EUR 511 million (633 million), and net profit for the period was EUR 390 million (477 million). Earnings per share were EUR 1.51 (1.86).

Given the capital-intensive nature of its business, Neste Oil uses return on average capital employed after tax (ROACE) as its primary financial target. As of the end of September, the rolling twelve-month ROACE was 13.1% (financial period 2007: 15.5%). The target is at least 15% over the cycle.

 

 

Investments during the first nine months totaled EUR 323 million (236 million), of which Oil Refining accounted for EUR 98 million, Renewable Fuels EUR 141 million, Specialty Products EUR 19 million, Oil Retail EUR 41 million, and Shipping EUR 1 million. Capital investments in the Other segment totaled EUR 23 million. The largest single item in this figure was the acquisition of Rintekno.

Depreciation in January-September period was EUR 168 million (139 million).

Interest-bearing net debt totaled EUR 1,295 million at the end of September (31 Dec 2007: 755 million). This increase was mainly caused by a high level of working capital due to temporarily high receivables at the end of September. High working capital also resulted in lower net cash from operating activities between January and September of EUR 26 million (321 million).

 

Net financial expenses between January and September were EUR 27 million (25 million). The average interest rate of borrowings at the end of September was 4.9%, and average maturity 4.3 years. Liquidity is healthy, with cash and cash equivalents and committed, unutilized credit facilities amounting to EUR 1,217 million at the end of September (31 Dec 2007: 1,492 million). The company sees no major refinancing needs until 2012. Short-term financing needs are met by revolving credit and overdraft facilities. There are no financial covenants in existing loan agreements.

The equity-to-assets ratio was 45.1% (31 Dec 2007: 49.9%), the gearing ratio 51.7% (31 Dec 2007: 31.1%), and the leverage ratio 34.1% (31 Dec 2007: 23.7%).

 

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

 

After rising for eight months, crude oil prices fell significantly during the third quarter. Brent Dated reached a new record of USD 144/bbl at the beginning of July, but fell back to USD 90/bbl and averaged USD 115/bbl (75) during the quarter. Due to the worsening outlook of the world economy and a fall in demand forecasts, market sentiment shifted and money was pulled out of commodities. Simultaneously, the US dollar strengthened. Stronger fuel oil margins and supply problems with Middle Eastern grades boosted Russian crude, and the price differential between Urals and Brent Dated narrowed, averaging USD -2.61/bbl (-2.53).

 

Refining margins improved in the third quarter, mainly because of disruptions in oil production and at refineries in the US Gulf, caused by hurricanes Gustav and Ike. Declining crude oil price also supported product demand. The international reference refining margin in North-West Europe, IEA Brent Cracking, averaged USD 5.24 /bbl (4.39).

 

Margins for middle distillates remained high, although somewhat below the peaks seen in the second quarter. Diesel supplies increased, and additional demand resulting from power generation problems in Asia diminished. Distillate margins improved during September, both because of the hurricanes in the US and the European maintenance season.

 

US gasoline demand continued to fall due to the economic downturn and high prices. Margins peaked in September as hurricanes caused shutdowns at US Gulf refineries. In September and October, gasoline margins remained at a relatively good level compared to the second quarter.

 

Fuel oil margins were surprisingly strong. Marine fuel oil was in good demand in the East and South-East Asia and was shipped there from Europe. In addition, fuel oil for power production use was in demand in the Persian Gulf.

 

Reduced vegetable oil prices have resulted in lower prices for biofuels. Margins for high-quality renewable fuels have remained healthy.

Demand has been declining in Neste Oil's retail markets in 2008, on the back of high prices and economic uncertainty, and this has been particularly evident  in respect of gasoline.

 

Crude freight rates continued to be unseasonably high, with both North Sea and Baltic rates some 85% higher compared to the same period in 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)

 

 

Neste Oil refined 3.8 million tons (4.0 million) of crude oil and feedstocks at its refineries in the third quarter, of which 3.1 million tons (3.3 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 88% (99%) during the quarter, while Naantali reached 99% (100%) capacity utilization.

The proportion of Russian Export Blend in Neste Oil's total refinery input was 52% (62%) during the third quarter.

The company has decided to reorganize its sales and trading activities as of 1 January 2009. The office in London will be closed and operations moved to Geneva, Switzerland.

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

Oil Refining posted a comparable operating profit of EUR 149 million (125 million) and an operating profit of EUR -2 million (148 million).

 

The increase in comparable operating profit resulted from a high total refining margin of USD 13.54/bbl (10.20). The benchmark IEA Brent cracking margin was USD 5.24/bbl (4.39). The weak US dollar compared to the same period in 2007 continued to have a negative impact.

 

The stronger total refining margin was due to strong diesel margins and profitable gasoline exports to the North American market. As a result of the maintenance shutdown of the new diesel line, however, Neste Oil's ability to use heavier Russian crude was limited. Higher energy costs also had a negative effect on the total refining margin.

 

Oil Refining's rolling 12-month comparable return on net assets at the end of September was 19.3%.

Renewable Fuels posted a comparable operating profit of EUR -3 million (-6 million) and an operating profit of EUR -2 million (-7 million) in the third quarter.

 

Although operations at the first NExBTL renewable diesel production plant at Porvoo were profitable, sales volumes were lower compared to the second quarter. The NExBTL margins have remained healthy. 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 September was 8.3%.

 

Specialty Products posted a comparable operating profit of EUR 29 million (34 million) and an operating profit of EUR 23 million (34 million) in the third quarter.

 

Base oil margins recovered compared to previous quarters as a result of declining feedstock prices. Gasoline components suffered from a weak gasoline market. Nynas showed good profitability, supported by normal seasonality.

 

Specialty Products' rolling 12-month comparable return on net assets at the end of September was 15.8%.

 

*includes both station and terminal sales

 

Oil Retail recorded a comparable operating profit of EUR 7 million (21 million) and an operating profit of EUR 9 million (22 million) in the third quarter. The segment's profitability was negatively impacted by an additional EUR 11 million write-down on business partner-related receivables. A write-down of EUR 4 million on the same case was reported in the second quarter. Revamping of the Finnish station network has increased fixed costs.

 

Neste Oil has been able to retain its market share of the Finnish gasoline market, despite a decline in gasoline demand throughout 2008. Lower demand has also put pressure on gasoline retail margins. Diesel volumes have continued to increase. The ongoing project aimed at strengthening Oil Retail's profitability and position in Finland has proceeded according to plan.

 

The downturn of the Baltic economies has been reflected in lower volumes, but retail margins have not been affected significantly. Volumes and margins in North-West Russia were softer compared to the same quarter in 2007.

 

At the end of the quarter, Neste Oil had 891 (896) outlets in Finland and 279 (257) around the Baltic Rim.

 

Oil Retail's rolling 12-month comparable return on net assets at the end of September was 10.0%.

Shipping recorded a comparable operating profit of EUR 23 million (-1 million) and an operating profit of EUR 22 million (-4 million).

 

This stronger profitability was driven by unseasonably high freight rates compared to the same quarter in 2007 and an excellent fleet utilization rate. 

 

Shipping's rolling 12-month comparable return on net assets at the end of September was 16.4%.

 

A total of 85,821,084 Neste Oil shares were traded in the third quarter, totaling EUR 1.3 billion. The share price reached EUR 17.89 at its highest and EUR 14.25 at its lowest, and closed the quarter at EUR 14.57, giving the company a market capitalization of EUR 3.7 billion as of 30 September 2008. An average of 1.3 million shares were traded daily, equivalent to 0.5% of the shares outstanding.

 

Neste Oil's share capital registered with the Company Register as of 30 September 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 September, the Finnish state owned 50.1% of outstanding shares, foreign institutions 23.0%, Finnish institutions 18.2%, and Finnish households 8.6%.

 

 

 

Neste Oil has clarified its claims against YIT Industrial and Network Services to  total some EUR 107 million in a contract dispute that was put before the Court of Arbitration in April this year. Neste Oil's claims against YIT consist of damages based on contract delays, now specified at approximately EUR 38.5 million, and damages valued at some EUR 68.5 million resulting from subsequent lost production. The dispute between Neste Oil and YIT relates to disagreements related to the final financial settlement of mechanical installation work on diesel production line 4, which was completed and came on stream at Neste Oil's Porvoo oil refinery in the summer of 2007. YIT has lodged counter-claims against Neste Oil totaling some EUR 25 million, primarily based on work carried out under the contract and the additional costs incurred due to the prolongation of the project. Both parties contest each other's claims.

 

President & CEO Risto Rinne retired as of 1 October 2008 after more than 30 years of service in the company. Mr. Matti Lievonen has been appointed the new President & CEO and will join the company on 1 December. Deputy CEO Jarmo Honkamaa will handle the duties of President & CEO until Matti Lievonen takes over.

 

The Chief Financial Officer, Petri Pentti, left Neste Oil at the end of September to work in another company. His successor is yet to be nominated. Corporate Controller Risto Takkala will serve as Interim CFO until the new CFO joins the company.

 

 

 

Neste Oil had an average of 5,162 (4,806) employees in the third quarter. At the end of September, Neste Oil had 5,182 employees (30 September 2007: 4,834).

 

 

The main 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 5.8 (5.7) at the end of September 2008. The target for 2008 is below 5.

 

The cumulative number of lost workday injuries was 41 at the end of September, with the frequency (LWIF) of 3.4. The target is below 3.

 

Neste Oil has continued to implement its clean fuel strategy. As part of this the company's current investment projects consist of new plants to increase the production of renewable diesel and high-quality base oils. The company is also investing in an isomerization unit to improve gasoline quality. All ongoing investment projects in Porvoo, Singapore, Rotterdam and Bahrain are progressing according to plan.

 

The basic engineering for a new hydrocracker unit at the Naantali refinery has been completed. Due to uncertainty in the global economic situation and high investment costs, the company has decided not to proceed with the project for the time being.

 

 

 

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 uncertainty in the foreseeable future is the slowdown of the world economy, which is likely to reduce the demand for petroleum products and gasoline in particular. The problems in the international financial market have increased uncertainties. As a consequence, managing customer receivables risks has become even more important. Sudden and unplanned outages at Neste Oil's production units or facilities continue to represent a short-term risk.

 

Rapid and large changes in feedstock and product prices may lead to significant inventory gains or losses, or change in working capital. These may have a material impact on the company's IFRS operating profit and net cash from operations.

 

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 development and content of the bio fuel legislation in the EU and other key market areas may influence the speed at which the demand for these fuels develops.

 

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.

 

 

 

Uncertainty in the global economy looks set to continue and this has already resulted in unprecedented volatility in oil prices. Neste Oil expects to report additional inventory losses in the fourth quarter of 2008.

 

Forecasts for global oil demand have been revised down throughout the year, and reduced demand has been most evident in gasoline and the US in particular.

 

Demand for diesel and middle distillates is believed to remain strong relative to gasoline, primarily driven by Asian demand. This is likely to support the competitiveness of complex refining companies that are geared towards diesel production, such as Neste Oil.

 

Volumes of NExBTL renewable diesel will be low during the fourth quarter, due to a one-and-a-half month planned maintenance outage at the Porvoo plant.

Base oil margins are expected to stay healthy for the remainder of 2008. Demand for iso-octane gasoline component demand is estimated to suffer from the weak gasoline market.

The continuation of the economic slowdown is likely to affect the oil retail market in Finland and around the Baltic Rim.

Oil freight rates have normalized after unseasonably high rates during the past two quarters.

 

The Group's capital expenditure estimate for 2008 has been revised down to approximately EUR 550 million from EUR 600 million previously.

 

Neste Oil will publish its full-year and fourth-quarter results for 2008 on 5 February 2009 at approximately 9:00 a.m. EET.

Espoo, 23 October 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.