Strong Buy on China Petroleum

On Aug 31, Zacks Investment Research upgraded China Petroleum and Chemical Corporation (SNP) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

China Petroleum and Chemical Corporation (SNP or Sinopec), with its head office in Beijing, China, is one of the largest petroleum and petrochemical companies in Asia. The company is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. The company is also the largest producer and distributor of petrochemicals in the nation.

Supported by outstanding domestic results in oil and gas exploration, the company posted earnings per share of $1.92 per ADS in the second quarter of 2013 which jumped 36.2% year over year. The long-term expected earnings growth rate for the company is 6.9%.

Revenues in the first half, improved 5.0% to 1,415.244 billion yuan from 1,347.85 billion yuan in the prior-year period. During the six-month period ending Jun 30, 2013, Sinopec’s crude oil production grew 1.4% year over year to 165.4 million barrels, while natural gas volumes surged 11.8% to 324.1 billion cubic feet.

Domestic crude oil production increased 1.1% year over year to 153.7 million barrels, while overseas volumes increased 5.8% year over year to 11.8 million barrels. Total oil and gas production expanded 3.8% to 219.5 million barrels of oil equivalent.

The present valuation also makes the partnership attractive. The forward P/E multiple of 7.6% is at a discount of 21.6% to the peer group average of 9.7%. The ROE of the company currently stands at 12.5%, which is higher than the peer group average of 8.1%.

The Zacks Consensus Estimate for 2013 has risen 9.6% in the last 30 days to $10.02 per ADS, reflecting year-over-year growth of 14.3%. For 2014, the Zacks Consensus Estimate increased 9.3% in the past 30 days to $11.28 per share, reflecting year-over-year growth of 12.6%.

Apart from China Petroleum, other operators in the sector having a favorable Zacks rank are Carrizo Oil & Gas Inc. (CRZO), Whiting USA Trust I (WHX) and Oiltanking Partners, L.P. (OILT). All these stocks presently sport a Zacks Rank #1 (Strong Buy).

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