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Oil Earnings Mixed On "Weak" Gasoline Margins

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HOUSTON — The roiling global oil market continues to pick its winners and losers, as oil giant BP PLC reported a 28 percent rise in second-quarter profit while North America's largest refiner, Valero, said its earnings for the same period fell 67 percent.

Both companies said Tuesday that record crude prices cut into results during the April-June period as they outpaced the money that can be made on gasoline and other finished products. But BP reaped massive profits from its exploration and production arm _ which Valero doesn't have.

BP, Europe's second-biggest oil producer, posted net profits of $9.47 billion, up from $7.38 billion in the same period a year ago. Sales jumped 49 percent to $110.98 billion as the price for a barrel of oil rose by roughly 35 percent over the quarter.

Conversely, San Antonio-based Valero Energy Corp. said its net income for the April-June period fell to $734 million, or $1.37 a share, from $2.25 billion, or $3.89 per share, a year ago. Revenue rose to $36.6 billion from $24.2 billion in the prior-year period.

"There is no question that gasoline margins continue very weak" and are likely to remain so, Valero chairman and chief executive Bill Klesse said in a conference call with investors.

Still, the company's results beat Wall Street forecasts, and executives said Valero's balance sheet is healthy. Its shares rose $1.15, or 3.6 percent, to $32.96 in afternoon trading. They've traded in a range of $29.70 to $75.75 in the past year.

It was one of only few American energy companies that had a good day, as oil prices fell another $3 Tuesday and the Wall Street had its best day in two weeks.

Last week, ConocoPhillips kicked off the earnings period for major oil companies with a whopping $5.44 billion profit, up 13 percent from adjusted results a year earlier. Exxon Mobil Corp., Chevron Corp. and others are expected to post equally robust earnings when they report later this week.

The strong year for BP has been overshadowed by an ongoing fight with Russian shareholders for control of the TNK-BP joint venture. The company's American chief executive Robert Dudley left Russia last week when his work permit was not renewed. BP has accused the Russian investors of using corporate raider tactics to wrest control of the company.

"We will vigorously defend our rights using all legal means possible," BP chief executive Tony Hayward said Tuesday. "We will not be intimidated by strong-arm tactics."

BP shares fell $1.21, or about 2 percent, to $60.59 in afternoon trading. Its shares have traded between $57.85 and $79.77 in the past year.

At Valero, as expected, refining margins fell markedly in the second quarter _ mirroring the first three months of 2008 _ as the cost of crude and other feedstocks grew more rapidly than the prices of gasoline, asphalt, fuel oil and other products.

The company noted the average price of the benchmark West Texas Intermediate crude nearly doubled to $123.98 in the most-recent quarter from $64.89 a year ago. At the same time, benchmark Gulf Coast gasoline margins declined 77 percent to $6.60 a barrel in the second quarter. They were nearly $29 a barrel a year ago.

Partially offsetting the weaker margins were substantially higher margins on diesel and jet fuels, whose global demand remained high.

Valero's operating income was squeezed by other factors in the quarter, including higher costs for electricity and natural gas. Operations also were hampered by maintenance and repairs at its refineries in Aruba, Port Arthur, Texas, and Delaware City, Del.

Klesse said Valero sees no immediate improvement in margins on gasoline, though he predicted margin recovery for some secondary products if crude prices stabilize or fall _ as they have in recent weeks.

He said the company continues to review its capital spending and now expects to reduce 2008 expenditures by $700 million from its original estimate of about $4.5 billion.

Valero operates 16 refineries and 5,800 retail and wholesale outlets in the United States, Canada and the Caribbean.

"Obviously, gasoline margins have weakened and the availability of financing is clearly lacking as the financial markets continue in turmoil," said Klesse, noting the refining industry's history of being "seasonal, volatile and cyclical."

In a shot at lawmakers, Klesse said Valero and other refiners can manage industry challenges, "but unfortunately reckless rhetoric in Washington, D.C., complicates our forward progress."

He said many in Congress are more interested in scoring "populist political points" than reducing energy costs.

"To not allow companies to look for oil and gas when there are huge potential reserves in the U.S. is irresponsible," Klesse said.

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On the Net:

Valero Energy Corp.: http://www.valero.com

BP PLC: http://www.bp.com

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AP Business Writer Jane Wardell in London contributed to this report.