China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported first half 2011 net income of 40.24 billion yuan (US$6.144 billion) and earnings per share of 0.464 yuan ($7.08 per ADS), both up 9.4% year over year. The increase can be attributable to higher capacity, domestic economic growth, and most importantly increased prices for petroleum and related products.
Operational Performance
Sinopec’s crude oil production dropped 5.4% year over year to 156.32 million barrels, while natural gas volumes surged 26.6% to 253.88 billion cubic feet. Overhaul of offshore production machinery resulted in the decline of crude oil volume overseas. However, a sharp rise in crude oil and natural gas prices lifted the Exploration and Production (E&P) segment’s operating profit, which climbed 25.9% over the prior-year quarter to 34.7 billion yuan (US$5.30 billion).
The company’s refining business recorded crude oil processing volumes of 108.53 million tons (up 5% year-over-year) and refined oil products output of 63.40 million tons (up 4.8% year-over-year). However, the segment registered an operating loss of 12.2 billion yuan (US$1.86 billion).
The Marketing and Distribution segment sold 80.42 million tons of refined oil products, reflecting a 12.3% year-over-year increase. The segment’s operating profit was 19.6 billion yuan (US$2.99 billion), up 35.6% from the comparable period last year.
The output of ethylene from the Chemicals segment was 5.015 million tons, up 19.3% from the year-ago level. Operating profit from this segment jumped 96.0% year over year to 16.3 billion yuan (US$2.49 billion).
Capital Expenditure (Capex)
Capital expenditures for the first half of 2011 totaled 33.567 billion yuan (US$5.13 billion), of which 17.406 billion yuan (US$2.66 billion) was spent on exploration at projects in key oilfields, including Shengli Tanhai Oilfield, northwestern Tahe Oilfield and northeastern Sichuan natural gas project, as well as the Shandong LNG project.
In the Refining segment, Sinopec spent 3.656 billion ($0.56 billion) for product quality upgrades, overhauling the refinery projects in Beihai and Changling, as well as for the Rizhao-Yizheng crude oil pipeline construction.
Capital expenditures in the Marketing and Distribution segment were 9.523 billion yuan (US$1.45 billion). Capital expenditures in the Chemicals segment totaled 2.12 billion yuan ($0.32 billion), mainly on the construction of Wuhan ethylene plant and the Zhongyuan methanol-to-olefins feedstock projects.
Guidance
For the second half of 2011, Sinopec has set targets to produce 165 million barrels of oil and process 114 million tons of oil, besides generating 247.2 billion cubic feet of natural gas. The company also expects the total domestic sales volume of refined oil products in the second half of the year to be 74.9 million tons and manufacture 4.84 million tons of ethylene.
Outlook
A step-up in China’s economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players rallying to meet the country’s fast-growing energy needs. Being one of the two integrated oil companies in China, Sinopec is well positioned to capitalize on these favorable trends.
We believe the company is trying to build a better position in the E&P space and expect 2011 to be a profitable year owing to the higher contribution from upstream activities. The company plans to accelerate the exploration of Tazhong and Bachu areas in western China. Overall appraisal activity will remain high in the northern and western margin of the Junggar Basin and the southern areas of Ordos. Natural gas blocks such as Yuanba, southeast Sichuan and Xinchang, will also see enhanced development activities. However, we remain concerned about Sinopec’s refining business primarily due to the heavily regulated price environment. Though Chinese oil companies, like PetroChina Co. Ltd. (PTR), are able to charge close to market prices for their crude oil (though heavily taxed), the government plays a major role in refined-product pricing (particularly gasoline and diesel) to control inflation.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term. For the long term, we maintain our Neutral recommendation on the stock.
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