China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported third quarter 2011 net income of 19.72 billion yuan (US$3.07 billion) and earnings per share of 0.228 yuan ($3.55 per ADS), both up 0.5% year over year. The increases can be attributable to domestic economic growth, and most importantly higher prices for petroleum and related products.
Operational Performance
During the nine month period ending September 30, 2011, Sinopec’s crude oil and natural gas production upped 0.8% year over year to 303.27 million barrels of oil equivalent. Natural gas volumes surged 22.1% to 382.25 billion cubic feet, while domestic crude oil production increased by 0.5% year over year to 226.81 million barrels. However, overseas production of crude oil dropped significantly due to the impact of overhaul.
A sharp rise in crude oil and natural gas prices lifted the Exploration and Production (E&P) segment’s operating profit by 35.3% over the prior-year nine month period to 55.3 billion yuan (US$8.50 billion).
On a year-over-year basis, crude oil prices jumped 39.2% to US$98.23 per barrel, while natural gas price increased 16.1% to US$5.47 per thousand cubic feet, during the first three quarters of 2011.
The company’s refining business recorded daily crude oil processing volumes of 4.37 million barrels (up 3.6% year over year) and refined oil products output of 95.45 million tons (up 3.5% year over year). However, the segment registered an operating loss of 23.1 billion yuan (US$3.55 billion).
The Marketing and Distribution segment sold 121.58 million tons of refined oil products, reflecting a 10.3% year-over-year increase. The segment’s operating profit was 31.9 billion yuan (US$4.9 billion), up 36.8% from the comparable period last year.
The output of ethylene from the Chemicals segment was 7.356 million tons, up 11.3% from the year-ago level. Operating profit from this segment experienced a substantial lift of 128% year over year to 23.7 billion yuan (US$3.64 billion).
Capital Expenditure
Capital expenditures for the first three quarters of 2011 totaled 57.028 billion yuan (US$8.77 billion), of which 23.266 billion yuan (US$3.58 billion) was spent on exploration at projects in key oilfields, including Shengli Beach Oilfield, northwest Tahe Oilfield, natural gas exploration and development in northeastern Sichuan and the Shandong LNG project.
In the Refining segment, Sinopec spent 8.538 billion ($1.31 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 17.489 billion yuan (US$2.69 billion). Capital expenditures in the Chemicals segment totaled 6.801 billion yuan ($1.05 billion), mainly on the construction of Wuhan ethylene plant and the Zhongyuan methanol-to-olefins feedstock projects.
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 made new discoveries in the matured fields in eastern China, the Tuofutai area of the Tahe oil field in western China, and the northern margin of the Junggar Basin.
Notably, the company has accelerated the exploration and development of unconventional oil and gas. In oil-field development and production, Sinopec has made advances in improving the reserve development ratio, oil recovery rate and unit well productivity, maintained stable production of eastern oilfields and expedited the building of the production capacity of western oilfields.
We remain concerned about the company’s overseas upstream volume, which experienced a downfall in the first nine month period due to the overhaul of offshore production machinery.
The company, which competes with CNOOC Ltd (CEO), holds a Zacks #2 Rank (short-term Buy rating). For the long term, we maintain our Neutral recommendation on the stock.
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