Russian oil major OAO Lukoil Holdings (LKOH.RS) Friday said second-quarter net profit dropped 44% on the year as oil prices fell, but beat expectations due to higher downstream sales and lower taxes. Earnings, which more than doubled from the January to March period, are expected to continue rising this year, but declining output rates in Western Siberia could hurt future profitability, analysts say.

Lukoil, 20% owned by ConocoPhillips (COP), reported a second-quarter net profit from April to June under U.S. Generally Accepted Accounting Principles of $2.32 billion, down from $4.13 billion a year earlier.

"The results are definitely very strong," said analyst Oswald Clint at Bernstein brokerage in London. The numbers came in higher than expected due to greater sales in the downstream segment, in particular at the company's refining capacity in Italy, he said. Lukoil strongly increased its presence in the European downstream segment, when it took a 49% stake in ERG SpA's Isab refinery in Priolo, Sicily, in November, and agreed to buy a 45% stake in Dutch refinery Total Raffinaderij Nederland, or TRN, in June.

"I'm not sure if this trend (higher downstream sales) is sustainable, as European downstream netbacks are likely to decrease into the next quarter," Clint added.

Revenue during the period was down 37% to $20.12 billion, as oil prices fell but despite a 4.8% rise in crude production in the quarter.

The increase in output came on the back of new production at the Yuzhnoye Khylchuyu oil field, located in the Timan-Pechora region. The field produced 1.7 million tons of crude oil - or almost 140,000 barrels a day - in the quarter.

Lower tax payments - in particular in the Timan-Pechora region - surprised analysts and supported second-quarter earnings before interests, taxes, depreciation and amortization, or Ebitda, which came in at $4.12 billion, down from $6.23 billion.

On Friday, the positive results boosted the company's valuation, which has gained more than 70% this year, since bottoming in mid-February.

At 1508 GMT, Lukoil's ADRs in London were trading up 3.9% at $50.6 each, valuing the company at almost $43 billion.

"We expect Lukoil's financials and profitability to continue growing in the third quarter given the favorable pricing conditions and anticipated production growth at South Khylchuya field," said Viktor Mishnyakov, analyst at UralSib brokerage.

Others remain concerned that production declines at mature fields in Western Siberia - Lukoil's traditional production area - despite increased capital spending.

"We expect a continued increase in unit lifting costs, which - combined with the tough tax environment - will continue to erode cashflow generation," said Bernstein's Clint.

Company Web site: www.lukoil.com

-By Jacob Gronholt-Pedersen, Dow Jones Newswires; +7 495 937 8445; jacob.pedersen@dowjones.com