UPDATE 2-Neste profit rises as renewable fuels investment pays off

Tue Feb 4, 2014 5:02am EST

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* Q4 operating profit 164 mln euros vs forecast 136 million

* Sees 2014 profit of 500 million euros

* Shares jump nearly 15 pct in early trade (Adds details and analysts' comments on renewable fuels, outlook)

HELSINKI, Feb 4 (Reuters) - Finnish oil refiner Neste Oil reported a stronger-than-expected rise in quarterly profit on Tuesday, as years of investment in its renewable fuels business paid off.

Neste shares rose nearly 15 percent in early trade after the company said fourth-quarter comparable operating profit rose to 164 million euros ($222 million) from 77 million euros a year earlier, beating an average forecast of 136 million euros in a Reuters poll.

State-controlled Neste has focused on its biofuels business, which makes renewable diesel from sources such as palm oil and animal fats, as a way of differentiating itself from bigger competitors.

The biofuels business, which Neste says produces enough renewable diesel from waste and residues to power more than 1 million cars a year, turned profitable in early 2013 for the first time since its launch in 2008.

The business made a full-year comparable operating profit of 273 million euros compared with a loss of 56 million in 2012. The company's overall comparable operating profit for 2013 was 604 million.

Investors have been wary about Neste's outlook due to pending U.S. government decisions on renewable fuel subsidies, sending its shares down 8 percent over the past month.

The company on Tuesday acknowledged uncertainty over U.S. policy, including volume targets for biomass-based diesel and a possible renewal of tax credits. But investors appeared to bet on positive outcomes sending the shares as high as 15.47 euros, the highest since November. They were up 9 percent at 14.69 euros by 0945 GMT.

"A lot of concern was priced in the stock. My target price was 15 euros, and after this report it is rather going up than down," said Antti Viljakainen, analyst at Inderes Equity Research.

Neste uses around 70 percent of its 40 million euro annual research and development budget for investigating feedstocks to produce renewable fuel.

In Neste's oil products division, quarterly comparable operating profit fell to 72 million euros from 116 million euros a year earlier amid weak European demand for petroleum products and additional refining capacity in Asia and the Middle East.

But Evli brokerage analyst Markku Jarvinen said the division's performance was stronger than the market expected.

Neste forecast full-year 2014 comparable operating profit of 500 million euros, in line with market expectations. Inderes analyst Viljakainen said the company was known for giving conservative forecasts.

Neste proposed a dividend for 2013 of 0.65 euro per share, up from 0.38 a year earlier and beating an average forecast of 0.52. ($1 = 0.7397 euros) (Reporting by Ritsuko Ando and Jussi Rosendahl in Helsinki and Simon Johnson in Stockholm; Editing by Erica Billingham)

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