Aug. 24 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, plans “rapid” overseas expansion to secure oil supplies after profit reached a record and as the nation’s economic recovery spurs fuel demand. Shares rose.

The Beijing-based company plans to buy overseas assets, including acquiring Addax Petroleum Corp. from its parent, Chairman Su Shulin told reporters in Hong Kong today. Net income surged to 22 billion yuan ($3.22 billion) in the second quarter, Huang Wensheng, spokesman at China Petroleum, known as Sinopec, said by phone.

Chinese energy companies have spent at least $13 billion on overseas assets since December as they take advantage of lower valuations caused by the global recession to meet energy demand in the world’s fastest growing major economy. Sinopec will invest in oil and gas fields overseas and expand refining ventures while focusing on cost reduction as it expects oil prices to rise in the second half, Su said.

“Sinopec’s main business is refining and it needs to increase its oil reserves and reduce its reliance on other oil producers,” said Larry Grace, an independent oil analyst based in Hong Kong. “There’s a government directive to increase overseas oil and gas assets.”

Sinopec rose 0.7 percent in Hong Kong to HK$6.97. The supplier of 80 percent of China’s fuel needs has gained 49 percent in Hong Kong trading this year and is the second-best performer on the Bloomberg World Oil & Gas Index.

Profit Increase

PetroChina Co., the world’s most valuable company, has climbed 30 percent, while Royal Dutch Shell Plc and Exxon Mobil Corp., the world’s biggest oil companies, have fallen as lower fuel consumption in the U.S. and Europe reduced profit.

First-half net income increased to 33.2 billion yuan, or 0.381 yuan a share, from a restated 7.7 billion yuan, or 0.057 yuan a share, a year earlier, Beijing-based Sinopec said yesterday in a statement to the Shanghai stock exchange. That beat the 27 billion-yuan median estimate in a Bloomberg survey of four analysts. Sales fell 27 percent to 534 billion yuan.

Sinopec also revised its first-quarter profit for 2008, Huang said today, without giving a figure.

The company’s second-quarter profit rose at least 10-fold from 2.2 billion yuan a year earlier, calculated by subtracting the first-quarter profit the company reported in April last year from the unrevised earnings for the first six months of 2008.

Fuel Prices

China has adjusted fuel tariffs five times this year, compared with twice in 2008, to reflect changes in crude oil prices and assure refiners a profit. The government raised prices of oil products such as gasoline and diesel by as much as 25 percent in 2009 under a new pricing system introduced in December. The policy shift helped Sinopec end at least four years of refining losses.

“These were very good figures and mainly a result of the new oil-product pricing mechanism and the company cutting costs,” said Michael Yuk, an analyst at Sun Hung Kai Financial in Hong Kong. “The prospects for the company are good as demand picks up.”

The National Development and Reform Commission, China’s top economic planner, said on May 8 the government will ensure a “normal profit” for refiners when crude trades below $80 a barrel. Refining margins will be reduced if crude trades between $80 and $130, the NDRC said.

Refining Profit

Crude futures in New York averaged less than $60 a barrel, down 52 percent from a year earlier, the biggest second-quarter drop on record. Oil is currently trading at around $73 and is up 66 percent this year.

First-half operating profit at Sinopec’s refining division climbed to 19.9 billion yuan compared with a loss of 46.5 billion yuan a year earlier.

Last year, operating losses from refining surged to 102 billion yuan from 13.7 billion yuan in 2007, as oil soared to a record $147.27 a barrel in July and government price caps prevented Sinopec from passing on higher costs to customers.

Sinopec gets almost all its revenue from refining and the sale and distribution of fuels. The company imports about 80 percent of the crude it processes.

The government’s 4 trillion-yuan stimulus spending has helped to boost domestic demand, Sinopec said yesterday. The Chinese economy grew 7.9 percent in the second quarter, accelerating from a 6.1 percent expansion in the first three months. Industrial production advanced 10.7 percent in June.

Global Expansion

Higher profit has encouraged Sinopec to embark on an expansion by increasing refining capacity and oil supplies. The company boosted spending on refining projects by 38 percent to 5.3 billion yuan while Sinopec’s exploration and production capital spending fell 7 percent to 19.4 billion yuan in the first six months, according to yesterday’s statement.

Sinopec has also set up a unit to review overseas acquisition opportunities, including assets in Angola, Russia, Kazakhstan, Nigeria and Australia owned by China Petrochemical Corp., said Su, who is also president of the parent company.

China Petrochemical said on Aug. 18 it had concluded the C$8.3 billion ($7.7 billion) acquisition of Addax to secure reserves in Iraq and Africa. In December, it bought Vancouver- based Tanganyika Oil Co., which holds stakes in two Syrian production-sharing agreements.

Parent’s Overseas Output

The group’s overseas oil output, excluding Addax’s production, may gain 15 percent to 10.4 million tons this year, Su told reporters today. Addax’s output may rise 70 percent to 12 million tons in 2013 from an estimated 7 million tons in 2009, he said.

“Investors are positive about Sinopec’s prospects, but the company faces some challenges in the third quarter,” said Wang Aochao, head of China energy research at UOB-Kay Hian Ltd. in Shanghai. “The price of oil is rising, but investors expect the government to raise refined oil product prices again in the next week or so, which will take the pressure off.”

The government may raise fuel prices this week after a price cut last month, the China News Service agency reported, citing three analysts.

To contact the reporter on this story: John Duce in Hong Kong at Jduce1@bloomberg.net; Ying Wang in Beijing at ywang30@bloomberg.net

Last Updated: August 24, 2009 06:56 EDT