Oil Refining Empire Helps Sinopec Beat Chinese Energy Rivals

Updated on
Refining Comes to the Rescue for Sinopec
  • Net income at China’s refining giant beats PetroChina, Cnooc
  • Shutting down inefficient and aging fields helps earnings

China Petroleum & Chemical Corp., the refining giant known as Sinopec, outshined its domestic state-run rivals in the first half of the year as its fuel-making business helped it weather the worst crude crash in a generation.

The world’s biggest refiner reported 19.9 billion yuan ($3 billion) in profit for the first half of the year, according to a filing Sunday with the Hong Kong stock exchange. While that’s down 22 percent from the same period in 2015, it’s more than double its net income in the second half of last year, when it posted its weakest earnings since 2002. Shares on Monday closed 0.2 percent lower at HK$5.61, compared with a 0.4 percent decline in the city’s benchmark Hang Seng Index.

“Sinopec continues to be a defensive play among China’s Big Three oil companies as its huge refining exposure puts it in a good position to benefit from a low crude price environment,” Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Kong, said by phone. “Sinopec’s management deserves a lot of credit for maximizing refining incomes while containing crude losses.”

The company’s rival PetroChina Co., the country’s biggest oil and gas producer, saw net income drop to 531 million yuan in the first half of the year, a 98 percent plunge even after booking a 24.5 billion yuan gain from selling a Central Asian gas pipeline network. Cnooc Ltd., China’s largest offshore explorer, reported a 7.74 billion yuan loss, mainly from a charge on the value of its Canadian oil sands assets.

Refining Volumes

A slump in crude prices benefits fuel makers like Sinopec as their supply costs fall, though the company is still vulnerable to the collapse as it’s the country’s third-biggest oil and gas producer. Brent crude, the global benchmark, averaged about $41 a barrel during the first half of the year, down roughly 30 percent from the same period in 2015.

The company’s refining margin, or the profit from turning crude into fuels, rose nearly 48 percent from same period last year to 514.4 yuan a ton, it said in a separate statement on Sunday.

Sinopec processed 115.9 million tons of crude into fuels during the first half of the year. That’s roughly equal to almost 4.67 million barrels a day, according to Bloomberg calculations. PetroChina refined the equivalent of nearly 2.66 million barrels a day, the company said in its release last week.

Sinopec will raise refining throughput in the second half of the year to 120 million tons, up 3.5 percent from the first six months, the company said on Sunday.

China’s oil refiners earlier this year got a boost from a government policy that halts retail fuel price adjustments when oil falls below $40 a barrel, putting a floor under gasoline and diesel prices while crude continued to drop. The rule boosted margins during Sinopec’s first quarter, when net income tripled from a year ago to 6.66 billion yuan.

China’s state-run oil giants have been slashing spending to weather the downturn, mainly impacting their exploration and production operations. The companies are relying more on overseas crude and natural gas to sustain output as production dwindles at home from aging, high-cost oil fields.

Sinopec’s crude production in the first half of the year tumbled to 154.2 million barrels, down 11.4 percent from the same period in 2015. Almost the entire drop came from domestic operations, which accounts for more than 80 percent of its crude output. The company forecasts total production will dip in the second half to 147 million barrels, it said Sunday.

Upstream ‘Disaster’

“Sinopec delivered better than expected first-half 2016 results as refining margins continued to benefit the group,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said in a note Monday. “Upstream remains a disaster.”

Sinopec shut some inefficient and aging oilfields that had higher production costs than international crude prices in the first half, Chairman Wang Yupu said at a press briefing on Monday in Hong Kong. The refiner will be able to quickly reopen most of these fields when prices return to a reasonable level, Wang said.

Natural gas production by Sinopec, which in the first six months rose 10 percent year-on-year to 388.7 billion cubic feet, will increase further to 421.2 billion cubic feet in the second half of the year, the company said.

Spending Cuts

PetroChina’s domestic crude output slipped 1.4 percent year-on-year to 470.6 million barrels during the first half. The company said last week that it aims to boost the share of natural gas to half its output by 2020, from about 37 percent now.

China last month pumped the least amount of crude since October 2011, and production has slipped 5.1 percent in the first seven months of the year, according to data from the National Bureau of Statistics. Natural gas output over the same period is up 3.1 percent.

Sinopec chopped capital expenditures in the first half of the year by more than 40 percent from the same period in 2015 to 13.5 billion yuan. PetroChina’s fell 17.5 percent to 50.9 billion yuan. Cnooc’s spending for the period dropped 33 percent to 22 billion yuan.

Sinopec maintained the 100.4 billion yuan capital spending target it set at the beginning of the year as it upgrades refineries and starts exploration projects in the second half, President Dai Houliang said at the same briefing on Monday.

The refiner also announced a new commercial oil and gas discovery in Xinjiang’s Tarim basin. The field may have oil and gas reserves of 1.7 billion tons, it said in an e-mailed statement. The company is targeting production of 1.5 million tons a year from the field by 2020.

— With assistance by Guo Aibing, and Stephen Tan

Before it's here, it's on the Bloomberg Terminal. LEARN MORE