Sinopec Posts Lowest Half-Year Profit Since 2008 on Refining

China Petroleum & Chemical Corp., Asia’s biggest refiner, posted its lowest half-yearly profit since 2008 after the sale of fuels at state-controlled prices reduced earnings.

Net income fell 41 percent to 24.5 billion yuan ($3.9 billion) from 41.17 billion yuan a year earlier, the Beijing-based company known as Sinopec said in an exchange filing today. The result beat a median estimate of seven analysts compiled by Bloomberg that called for a profit of 22.9 billion yuan.

The profit slide follows lower earnings for PetroChina Co., China’s biggest oil and gas producer, which expects fuel-pricing reforms in the second half to help cut losses from refining. Sinopec and parent China Petrochemical Corp. have announced more than $40 billion in deals to acquire assets globally since 2009 to build up oil and gas output and diversify from refining.

“Sinopec somehow did a nice job in cost control because they can process less-expensive, low-grade crude in many refineries,” said Gordon Kwan, Hong Kong-based head of energy research at Mirae Asset Securities Ltd. “Further upside in the second half will hinge on the pace of China’s domestic fuel-pricing reforms and improvement in its upstream-asset quality. Until then, it is likely Sinopec shares will lag behind rivals PetroChina and Cnooc.”

Lower Earnings

China’s three biggest oil companies posted lower earnings in the first half. PetroChina’s profit dropped 6 percent to 62 billion yuan, while Cnooc Ltd., China’s biggest offshore oil and gas explorer with no exposure to refining, said that net income declined 19 percent.

Sinopec stock has declined 12 percent in Hong Kong this year, while the benchmark Hang Seng Index gained 7.8 percent. The stock fell 2.6 percent on Aug. 24 to close at HK$7.17.

The company posted a loss of 18.5 billion yuan from processing 811 million barrels of oil in the first half. PetroChina, the country’s second-largest refiner, incurred a loss of 23.3 billion yuan from refining 489.7 million barrels.

Sinopec processed 1.1 percent more crude than a year earlier, when it lost 6.3 billion yuan less from refining.

“The loss came purely from the government’s policy of capping retail-fuel prices,” said Laban Yu, head of Asia oil & gas equity research at Jefferies Hong Kong Ltd. “There is not much Sinopec can do. We believe current low inflation will allow higher refiner margins in the second half and quite possibly a change in the fuel-pricing mechanism.”

Price Controls

The National Development & Reform Commission, China’s top economic planner, has indicated it may relax price controls on natural gas and fuels in the second half, PetroChina President Zhou Jiping said at a post-earnings briefing on Aug. 23.

Gasoline and diesel prices are set by the NDRC under a system that tracks the 22-day moving average of a basket of crudes, including Brent, Dubai and Indonesia’s Cinta. The cycle may be shortened to 10 days, China Petrochemical said March 28.

China, the world’s second-biggest oil consumer, cut fuel rates three times between May and July, helping truckers and motorists with the lowest pump prices since December 2010, while threatening profit margins at refiners. The nation increased gasoline and diesel prices this month for the first time since March after global crude costs climbed.

Brent crude, the benchmark for more than half the world’s oil, dropped 20 percent in the second quarter, the biggest decline since the final quarter of 2008.

Stimulus Policies

China’s economy expanded 7.6 percent in the second quarter from a year earlier, the least in three years, as Europe’s debt crisis and unemployment in the U.S. crimped export growth, and a crackdown on property speculation curbed domestic demand.

China is expected to release some stimulus policies in the second half to maintain stable economic growth, Sinopec said. Such policies would spur demand for fuel and chemical products, creating a so-called positive market environment for Sinopec’s businesses, it said in the statement.

First-half revenue increased 9.3 percent to 1.348 trillion yuan, Sinopec said in the statement. Operating profit dropped 31.4 percent to 40.1 billion yuan.

Sinopec plans to produce 163.75 million barrels of crude in the second half, including 9.14 million barrels from overseas, the company said. The refiner has a target of processing 112 million tons of crude in the second half.

Sinopec said it boosted first-half crude output 4.3 percent to 163.09 million barrels, and overseas production jumped 82 percent to 11.13 million barrels. Spending reached 51.5 billion yuan in the first six months, with 21.8 billion yuan on exploration and production.

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