China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported its full-year 2010 earnings per share of 0.808 yuan ($11.92 per ADS), up 12.5% year over year. However, full-year earnings fell short of the Zacks Consensus Estimate of $12.41. Net income increased 11.6% from the 2009 level to 68.3 billion yuan (US$10.1 billion). The increase can be attributable to strong oil products demand as well as rising prices of crude oil and oil products.
Operational Performance
Sinopec’s crude oil production remained flat at 327.85 million barrels, while natural gas volumes surged 47.6% to 441.4 billion cubic feet. Owing to a substantial increase in crude oil and natural gas prices, the Exploration and Production (E&P) segment’s operating profit was 47.15 billion yuan (US$6.95 billion), indicating a substantial increase of 97.3% from 2009.
The company’s refining business recorded crude oil processing volumes of 211.13 million tons (a 13.2% year-over-year increase) and production output of refined oil products of 124.38 million tons (a 9.4% year-over-year increase). However, operating profit of the refining business plunged 42.4% year over year to 15.86 billion yuan (US$2.34 billion).
The Marketing and Distribution segment sold 140.49 million tons of refined oil products, reflecting a 13.3% year-over-year increase, while the segment’s operating profit was 30.76 billion yuan (US$4.54 billion), up 1.5% from the 2009 period.
The output of ethylene from the Chemicals segment reached 9.059 million tons, up 34.9% from the 2009 level. Operating profit from this segment climbed 8.9% year over year to 15.04 billion yuan (US$2.22 billion).
Price Realization
Crude oil price realization in the period was 3,406 yuan ($502.4) per ton, representing a 38.2% increase from the year-earlier level. Realized natural gas price climbed 22.4% year over year to 1,174 yuan (US$173.2) per thousand cubic meters.
Capital Expenditure (Capex)
Capital expenditures in 2010 totaled 113.651 billion yuan (US$16.76 billion), out of which expenditures on exploration stood at 52.680 billion yuan (US$7.77 billion), due to the projects in key oilfields, including Tahe, Shengli and Angola Block 18, and gas fields in Puguang and Erdos. Pipeline construction of the Sichuan-to-Eastern China Gas Project also contributed to the exploration capex.
In the Refining segment, Sinopec spent 20.015 billion ($2.95 bllion) for product quality upgrades, refinery revamping projects to process low grade crude, as well as storage facilities and pipeline construction projects.
Capital expenditures in the Marketing and Distribution segment were 26.168 billion yuan ($3.86 billion). Capital expenditures in the Chemicals segment totaled 12.894 billion yuan ($1.90 billion), mainly due to the completion of ethylene project in Zhenhai and Tianjin. Additionally, Wuhan ethylene and Yanshan butyl rubber projects progressed well.
Guidance
For 2011, the company expects its capex to total 124.1 billion yuan. It also plans to produce 45.59 million tons of crude oil and 14.1 billion cubic meters (Bcm) of natural gas, and refine 222 million tons of crude oil.
Outlook
China’s impressive 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 more 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. We maintain our long-term Neutral recommendation for the stock.
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