What will convince investors to take a punt on Sinopec?
The biggest oil company on public markets is also one of the least loved. Blended forward 12-month pricing of its enterprise value relative to Ebitda is the lowest of any major integrated oil and gas business after Gazprom, Rosneft and Eni, according to data compiled by Bloomberg.
Its valuation is well below that of Phillips 66 and Marathon Petroleum, two U.S.-based peers whose skew toward refining matches Sinopec's own focus.
That downstream positioning is an advantage at the moment: While low crude prices are a problem for upstream companies who see oil as an end product, it's a huge advantage for refiners that treat it as an input on the way to selling liquids such as gasoline and diesel.
Sinopec's negative image hasn't budged even after first-half results at the weekend that showed a doubling of net income from the six months ended Dec. 31, 2015. The shares fell as much as 1.4 percent in early trade Monday.
Investors seem to be missing how much the Beijing-based company has been using lower crude prices and the better performance of its refineries to clean up its balance sheet. At a time when, as Gadfly's Liam Denning has written, debt remains a significant issue for oil majors, Sinopec is a rare beast that's actually managed to cut leverage relative to where it was three years ago.
Net debt has fallen more than 50 percent over the past 18 months to its lowest levels since 2007:
One issue hanging over China's refining sector is the rise of "teapot" refineries, independent processors that have seen deregulation that's allowed them to compete more aggressively with the traditionally dominant Sinopec and PetroChina.
That's less of a problem than you might think, however. For one, Beijing last week announced a crackdown on alleged tax evasion by teapots, in a move that should give comfort to state-run rivals.
In addition, the rise of the teapots appears to have done far more harm to PetroChina. The run rate of its refineries, a decent proxy for profitability since companies tend to idle capacity they can't make money operating, has slumped over the past six months while Sinopec's has held steady -- and both are seeing significantly higher utilization than the teapots.
There's good and bad news in that for investors. The good news is that Sinopec's shares look cheap relative to the rest of the industry, so might be set for a re-rating once shareholders start paying more attention to the improvement in its balance sheet. The bad news is that a bad image of a company can survive much longer than you'd expect.
Judging by the way Sinopec stock has been trading for the past four months, long positions might be in for a wait before they can cash out.
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