Sinopec Margins Set to Extend Slump as Fuel Prices Trail Crude
Sinopec Margins Set to Extend Slump
Qilai Shen/Bloomberg
China controls fuel prices to curb inflation in the world’s second-largest economy and the government has raised tariffs once this year compared with five increases in 2009.
China controls fuel prices to curb inflation in the world’s second-largest economy and the government has raised tariffs once this year compared with five increases in 2009. Photographer: Qilai Shen/Bloomberg
Aug. 23 (Bloomberg) -- Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong, talks about the outlook for Chinese oil stocks. China Petroleum & Chemical Corp., Asia’s biggest refiner also known as Sinopec, unexpectedly posted a 6.7 percent increase in first-half profit as a rebound in the nation’s economy spurred demand for oil, gas and petrochemicals. Cnooc Ltd., China’s biggest offshore oil producer, said Aug. 19 first-half profit more than doubled, beating estimates. Beveridge talks with Bloomberg's Susan Li. (Source: Bloomberg)
China Petroleum & Chemical Corp., Asia’s biggest refiner, may extend a slump in profit from making gasoline and diesel as government price controls prevent the company from passing on higher crude-oil costs to customers.
Margins from processing oil fell 45 percent in the first six months as crude costs surged 84 percent, the company known as Sinopec said in its earnings statement yesterday. The stock declined the most in almost two months after second-quarter net income dropped 10 percent from a year earlier compared with a 40 percent increase in the preceding three months.
China controls fuel prices to curb inflation in the world’s fastest-growing major economy and the government has raised tariffs once this year compared with five increases in 2009. Sinopec, which gets 80 percent of its revenue from producing and selling fuels, may step up acquisitions of oil and gas fields to reduce the Beijing-based company’s reliance on refining.
“I can see this kind of pressure on margins continuing in the third quarter if the government doesn’t increase refined oil-product prices again soon,” said Wang Aochao, a Shanghai- based analyst at UOB-Kay Hian Ltd. “Sinopec is likely to purchase more quality oilfield assets from its parent to boost earnings. By doing so, the listed unit will be able to offset risks from government restrictions on the refining business.”
Sinopec agreed in March to buy a share in an Angolan field from its parent, China Petrochemical Corp., for $2.5 billion to diversify income sources. The parent said in April it will pay ConocoPhillips $4.65 billion for its stake in Syncrude Canada Ltd. and last year acquired Addax Petroleum Corp. for C$8.3 billion ($7.9 billion) in China’s biggest overseas takeover.
Acquisition Opportunities
The shares dropped as much as 2.4 percent, the most since June 29, before closing 10 Hong Kong cents lower at HK$6.26. Sinopec has fallen 10 percent in the past 12 months, compared with the 1.7 percent gain in the benchmark Hang Seng Index.
“There are a lot of acquisition opportunities, but there may not be many good ones,” Chairman Su Shulin said at a media briefing in Hong Kong today. Sinopec will be cautious when evaluating takeover opportunities, he said.
China Petrochemical is in talks with several Brazilian companies on potential collaboration on onshore and offshore blocks, said Su, who’s also the parent company’s president. He didn’t give details.
“It is hard to say” where in the world the company will most likely make its next acquisition, Su said.
Quarterly Profit
“The government is wary of raising oil-product prices,” said Laban Yu, an analyst at Macquarie Hong Kong Ltd. who recommends holding the shares. “If the government doesn’t clarify what it will do as oil prices rise, then this perception will remain and Sinopec is stuck with it.”
Second-quarter profit fell to 19.68 billion yuan ($2.9 billion) from 21.97 billion yuan a year earlier, according to calculations made by subtracting first-quarter results from six- month earnings reported by Sinopec yesterday. Spokesman Huang Wensheng said he couldn’t immediately comment on the figure.
Net income in the first half rose 6.7 percent to 35.46 billion yuan, beating the median estimate of 32.4 billion yuan in a survey of 10 analysts compiled by Bloomberg. Revenue climbed 75 percent to 936.5 billion yuan, while operating costs increased 97 percent to 767 billion yuan. Gross margin from refining a ton of crude fell 45 percent to 237 yuan.
For the full year, Sinopec may report a 3 percent increase in profit to 63.4 billion yuan, according to the median estimate of 17 analysts surveyed by Bloomberg.
Refining Risks
Crude in New York rose more than 50 percent in the first half from a year earlier, more than doubling earnings for Chinese energy explorer Cnooc Ltd., which gets 99 percent of its revenue from oil and gas production. PetroChina Co., the country’s largest oil producer, may report a 36 percent growth in first-half profit, a Bloomberg survey of nine analysts showed.
Sinopec will build up its exploration and production business to counter the risks in refining, Chairman Su said.
The company aims to produce 12 billion cubic meters of natural gas this year, Chief Financial Officer Wang Xinhua said at the media briefing. That’s a 42 percent increase over 2009.
Sinopec aims to produce 42.55 million metric tons of crude oil this year, Wang said. Output was 42.42 million tons in 2009.
--Wang Ying and John Duce in Hong Kong. Editors: Ryan Woo, Jane Lee.
To contact Bloomberg staff on this story: Ying Wang in Hong Kong at +86-10-6649-7562 or ywang30@bloomberg.net; John Duce in Hong Kong at +852-2977-2237 or Jduce1@bloomberg.net
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