We are maintaining our long-term Neutral rating on China Petroleum & Chemical Corporation (SNP) or Sinopec. Though the uptrend in production and sales inspire optimism on the company, weak upstream activities and global economic volatility pose as dampeners.
Sinopec performed impressively in the first quarter of 2011, with earnings per share going up 26% year over year to 0.236 yuan or $3.59 per ADS. Net income also improved 25.2% from the prior-year level to 20.6 billion yuan or $3.133 billion. The company benefited from increased capacity as well as higher prices for petroleum and related products.
The fast-growing Chinese economy has boosted the demand for oil, natural gas and chemicals, paving attractive ways for industry players 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.
Sinopec’s natural gas business is expected to act as a major catalyst in the months ahead. Making an opportunistic move, Sinopec recently acquired 15% stake in an Australian gas project from ConocoPhillips (COP), thus expanding its horizon to the far south.
However, the company’s future prospects are somewhat clouded by the depressing results from the exploration and production unit along with volatile oil and gas fundamentals. Additionally, the supply-demand imbalance for refined products will continue to pull down Sinopec’s shares in the near-to-medium term.
Despite being an integrated oil company, Sinopec’s capital allocation is fairly different from the western oil majors. The asset structure that balances the risk-return trade off for the average western integrated major is two-thirds upstream/one-third downstream. Sinopec, on the other hand, is significantly downstream weighted, which adds to its disadvantage.
The other major areas of concern include operational disruptions, labor and material cost inflation that affect project outlays, governmental regulations and severe competition from domestic and international peers.
Considering these factors, we believe that there remains limited upside potential in the stock and the company will likely perform in line with the greater industry. Sinopec currently holds a Zacks #3 Rank, which translates into short-term Hold rating.
CONOCOPHILLIPS (COP): Free Stock Analysis Report
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