China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported first quarter 2011 earnings per share of 0.236 yuan ($3.59 per ADS), up 26% year over year. Net income increased 25.2% from the prior-year level to 20.6 billion yuan (US$3.133 billion). 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 almost 6% year over year to 10.98 million tones, while natural gas volumes surged 30% to 3.627 billion cubic meters. Temporary suspension of production for field maintenance resulted in the decline of crude oil volume. However, a sharp rise in crude oil and natural gas prices lifted the Exploration and Production (E&P) segment’s operating profit 14.3% over the prior-year quarter to 13.143 billion yuan (US$1.9951 billion).
The company’s refining business recorded crude oil processing volumes of 54.256 million tons (a 7.4% year-over-year increase) and refined oil products output of 31.301 million tons (a 6.2% year-over-year increase). However, the segment registered an operating loss of 576 million yuan (US$84.44 million).
The Marketing and Distribution segment sold 39.6448 million tons of refined oil products, reflecting a 14.7% year-over-year increase. The segment’s operating profit was 9.163 billion yuan (US$1.391 billion), up 41.3% from the comparable period last year.
The output of ethylene from the Chemicals segment was 2.5537 million tons, up nearly 26% from the year-ago level. Operating profit from this segment climbed 64.0% year over year to 9.312 billion yuan (US$1.4136 billion).
Price Realization
Crude oil price realization in the quarter was 4,007.03 yuan ($608.3) per ton, representing a 19.4% increase from the year-earlier level. Natural gas was sold at 1,268.78 yuan (US$192.6) per thousand cubic meters, indicating a 26.1% jump from the year-ago period.
Capital Expenditure (Capex)
Capital expenditures in the quarter totaled 13.97 billion yuan (US$2.1207 billion), out of which 6.696 billion yuan (US$1.0165 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 1.905 billion ($0.2892 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 4.085 billion yuan (US$0.6201 billion). Capital expenditures in the Chemicals segment totaled 1.229 billion yuan ($0.1866 billion), mainly on the construction of Wuhan ethylene plant and the Zhongyuan methanol-to-olefins feedstock projects.
Guidance
Sinopec had projected 2011 capex to total 124.1 billion yuan. It had also set targets of 45.59 million tons of crude oil and 14.1 billion cubic meters (Bcm) of natural gas production and 222 million tons of crude oil refining.
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 that can 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. 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.
PETROCHINA ADR (PTR): Free Stock Analysis Report
Be the first to comment