Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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.

Big and Unloved
Sinopec trades on one of the lowest valuations of major integrated oil and gas companies
Source: Bloomberg
Note: Shows only companies with at least $50B in trailing 12-month revenue. Marathon Petroleum and Phillips 66 are the only listed companies without significant upstream operations.

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.

Cleaning Up
Sinopec has had the sharpest balance sheet improvement over the past three years among its peers
Source: Bloomberg
Note: Shows change in total debt as % of common equity from 12 quarters ago to latest quarter. A company that went from 20% debt/equity to 40% debt/equity would record a result of -20.

Net debt has fallen more than 50 percent over the past 18 months to its lowest levels since 2007:

Lower Gear
Sinopec's net debt levels have been plummeting over the past 15 months
Source: Company reports, Bloomberg
Note: Data for December quarter of 2007 isn't available.

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.

Born to Run
The run rates of major Chinese refineries suggest that Sinopec is outperforming its peers
Source: Bloomberg Intelligence

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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. By revenue. Once Saudi Aramco completes its part-listing, Sinopec will be left in the dust.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net