Is It Worth Holding Sinopec (SNP) in Your Portfolio?

We issued an updated research report on China Petroleum & Chemical Corp. SNP on Dec 1, 2016.

The company is the second-largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. However, the crude price weakness has adversely affected the company’s earnings and cash flows, particularly at its upstream unit.

As a result, the company carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Sinopec’s strong refinery business has enabled it to withstand the crude price weakness to a large extent. In fact, the low crude price environment turned out to be a boon in disguise for the company as its massive refining exposure benefited it to quite an extent. During the nine-month period of 2016, the company’s refining business reported earnings of 41.6 billion yuan, up 215% from the prior-year comparable period.

Owing to these strong fundamentals, the company outperformed the Zacks-categorized Emerging Markets Integrated Market in the last one month. Data wise, Sinopec shares dipped 0.9%, whereas the Zacks-categorized Emerging Markets Integrated Market fell 1.4% over the last one month.

Sinopec’s natural gas business has immense potential for growth over the coming years as China moves from coal to natural gas. At present, China generates two-third of its electricity from coal-fired power plants, which emit pollution creating greenhouse gases. To mitigate this problem, China is planning to increase its natural gas usage significantly.

However, the exploration & production segment recorded a loss of 17.4 billion yuan in 2015 in spite of robust oil and gas exploration activities. The unit continued to underperform with much wider losses during the first nine months of 2016, mainly due to soft crude oil and natural gas prices. Although oil prices have started improving after the OPEC deal, the commodity remains way below the mid-2014 level. Hence, oil price weakness prevails.

Stocks to Consider

Some better-ranked players in the energy sector include Ultra Petroleum Corp. UPLMQ, EQT Midstream Partners, LP EQM and Helix Energy Solutions Group, Inc. HLX.

Ultra Petroleum is likely to witness year-over-year earnings growth of 425.8% in the current year. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

EQT Midstream is projected to witness year-over-year earnings growth of almost 14% in the current year. It has a Zacks Rank #2 (Buy).

Helix Energy posted an average positive earnings surprise of 56.42% in the last four quarters. The company has a Zacks Rank #2.

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