Shares in Finnish oil refining company Neste Oil Oyj (NES1V.HE) traded lower Thursday as the company reported a smaller-than-expected gain in first-quarter profit and said market conditions will improve slowly but steadily.

"Due to high inventory levels, coupled with new refining capacity coming on stream, we expect the recovery of refining margins to be a gradual one," Chief Executive Officer Matti Lievonen said.

Shares in Neste Oil reacted negatively to the news. At 0941 GMT, they traded 3.5% lower at EUR12.32. During the last year, they have gained 26%, compared with a 45% increase in the broader Helsinki market.

Neste Oil's net profit rose 6.7% to EUR64 million for the three months to March 31, trailing expectations for a net profit of EUR65.5 million according to a Dow Jones Newswires survey of seven analysts.

Still, better refining margins in the last two months of the quarter helped results.

"The rapid improvement in refining margins seen in February and March, compared to the end of 2009, was a positive surprise to us," Lievonen said.

Revenue rose 33% to EUR2.73 billion, while operating profit rose to EUR97 million from EUR95 million the previous year. Both numbers were below of analysts' expectations.

In its outlook, Neste Oil said diesel and middle distillate margins are expected to strengthen further in 2010, while gasoline margins will be softer in the second half of the year.

Analysts at Cheuvreux, which has an underperform rating with a EUR11.20 target price for Neste Oil, noted that the management still sees 2010 as a challenging year.

"We remain cautious," Cheuvreux said. It said results were in line with its estimates, however, with a different mix than expected.

Another Nordic analyst agreed the earnings were below expectations. "All in all, it is probably on the weak side," the analyst said.

Company Web site: http://www.nesteoil.com

-By Karl Bruze, Dow Jones Newswires; 46 8 545 130 95; karl.bruze@dowjones.com
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