China Petroleum and Chemical Corporation (SNP), also known as Sinopec, reported first half 2012 net income of 24.5 billion yuan (US$3.87 billion) and earnings per share of 0.272 yuan ($4.30 per ADS), both down approximately 40.5% and 41.1%, year over year, respectively.
Slower domestic economic growth was largely responsible for the decline. Moreover, increases in the price of international crude oil – amid government caps on fuel prices – prevented the company from fully passing on spiraling costs to consumers, and thereby hurt refining margins.
However, first half revenue surged 9.3% to 1,348.1 billion yuan from 1,233.3 billion in the year-earlier period mainly attributable to higher contributions from the upstream exploration and production segment.
Operational Performance
During the six-month period ending June 30, 2012, Sinopec’s crude oil production expanded 4.3% year over year to 163.09 million barrels, while natural gas volumes surged 14.1% to 289.78 billion cubic feet. Domestic crude oil production increased marginally by 1.2% year over year to 151.96 million barrels though overseas volumes increased considerably by 82.5% year over year.
A sharp rise in crude oil and natural gas prices as well as an increase in natural gas and crude oil sales volume lifted the Exploration and Production (E&P) segment’s operating profit by 16.8% over the prior-year period to 40.5 billion yuan (US$6.40 billion).
The company’s refining business recorded crude oil processing volumes of 109.76 million tons (up 1.1% year over year) and refined oil products output of 65.95 million tons (up 4.0% year over year). However, the segment registered an operating loss of 18.5 billion yuan (US$2.92 billion) as crude oil price jumped significantly amid domestic control over the refined oil products prices.
The Marketing and Distribution segment sold 82.67 million tons of refined oil products, reflecting a 2.8% year-over-year increase. The segment’s operating profit was 20.3 billion yuan (US$3.21 billion), up 3.3% from the comparable period last year.
The output of ethylene from the Chemicals segment was 4.810 million tons, down 4.1% from the year-ago level. Operating loss from this segment was 1.3 billion yuan (US$0.21 billion). The underperformance was mainly due to a weak chemical market and a sharp fall in prices of important chemical products.
Capital Expenditure
Capital expenditures for the first half of 2012 totaled 51.504 billion yuan, of which 21.839 billion yuan was spent on exploration at projects in key oilfields, including Shengli shallow water oilfield, northwest Tahe Oilfield, Ordos oil and gas fields, natural gas exploration and development in Sichuan and the Shandong LNG project.
In the Refining segment, Sinopec spent 10.427 billion for product quality upgrades, overhauling the refinery projects in Sinopec Shanghai Petrochemical and Jinling Petrochemical Corp.
The Marketing and Distribution segment expended 12.39 billion yuan for the construction of gas stations on highways, in important cities and newly planned regions. Capital expenditures in the Chemicals segment totaled 6.341 billion yuan, mainly due to the construction of the Wuhanethylene plant, the Yanshan butyl rubber project and the Yizheng butylene glycol project.
Guidance
Beijing-based Sinopec, Asia’s largest refiner in capacity terms, expects to produce 163.75 million barrels of crude in the second half of the year. The guidance includes 9.14 million barrels from overseas. The refiner has also a target of processing 112 million tons of crude during the period.
Sinopec highlighted that China will likely make some changes in its monetary or fiscal policies in the second half to maintain stable economic growth. It also aims at encouraging demand for fuel and chemical products that would create a positive market environment for Sinopec’s businesses.
Outlook
We remain apprehensive about the volatile oil and gas fundamentals and a weak macro environment. We believe that Sinopec’s matured domestic oil fields and the associated rise in costs will continue to be an overhang on its operations as natural declines become pricier to counterbalance.
Sinopec remains more exposed to government directed price controls owing to its large downstream refining and petrochemicals operations compared to its peer company PetroChina Ltd. (PTR) – China’s largest listed oil company by capacity. Notably, Sinopec, along with other two largest oil companies in China – PetroChina and CNOOC Ltd. (CEO) posted lower earnings in the first half.
The company expects to face challenges in 2012 due to complex geopolitical tensions and higher oil prices internationally. Domestic economic growth is experiencing a downward pressure. As such we are maintaining our Underperform rating on Sinopec, which retains a Zacks #4 Rank (short-term Sell rating).
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