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Russia's second-biggest oil producer OAO Lukoil Holdings (LKOH.RS) Wednesday said it returned to profitability in the first quarter, which analysts believe could mark a recovery for the Russian oil industry.

The company said lower taxes, higher crude prices, a weaker ruble and lower capital spending lifted earnings out of the net loss seen in the last three months of last year - a quarter that the company said was the worst in its history.

Lukoil, 20% owned by ConocoPhillips (COP), reported a net profit under U.S. Generally Accepted Accounting Principles of $905 million. Although that was below the year-ago figure of $3.16 billion, due to lower oil prices, the figure beat a Dow Jones Newswires poll of 10 analysts, who had forecast $595 million.

The company follows the trend set last week when Russia's biggest oil producer OAO Rosneft (ROSN.RS) beat earnings forecasts.

Last year, lobbying efforts by both companies led to a decision to lower the so-called mineral extraction tax and impose tax holidays for certain production regions. Lukoil said the cuts led to a $300 million reduction in taxes for the first quarter.

"We should thank the government," said Leonid Fedun, Deputy Chief Executive at Lukoil, adding that "the reality isn't as scary as sometimes predicted."

The company said earnings before interest, taxes, depreciation and amortization halved to $2.41 billion in the first quarter -- but, again, came in above consensus, due to significant cost savings.

"This trend has been seen in Rosneft's (ROSN.RS) first quarter results already -- still positive -- implying Lukoil is very competitive and is on the way to higher efficiency amid a weaker ruble and lower service prices," said Lev Snykov, an analyst at VTB Capital in Moscow.

Lukoil cut capital spending by 39% on the year, to $1.47 billion.

"The decrease was in compliance with our plan to reduce capital expenditures in 2009 because of the economic downturn," Lukoil said in a statement.

Despite an improved operating environment, some analysts remain skeptical and say the industry still faces challenges. Since the beginning of the current quarter, taxes have gone up with the oil price, while the ruble has appreciated - opposite developments to those that helped the group's profitability in the first quarter.

"The conditions for a sustainable improvement in Lukoil's earnings and cash-flow are not yet apparent," said analyst Oswald Clint from Bernstein. He also believes the company's output volumes will weaken for the rest of the year, after rising 3.2% in the first quarter.

Revenue fell 41% to $14.75 billion from $24.96 billion, mainly due to lower oil prices.

After being hit by the slump on world markets last year, Lukoil's stock has almost doubled in value since bottoming in mid-February. Lukoil shares Wednesday closed down 5.0% at $53.2 in Moscow.

Company Web site: www.lukoil.com

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