China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported its third-quarter earnings per share of 0.224 yuan ($3.31 per ADS), up 13.7% year over year. Net income in the quarter increased 14.7% from the comparable 2009 level to 19.6 billion yuan ($2.90 billion). The increase can be attributed to strong demand for oil products as well as higher contributions from upstream exploration.
Operational Performance
Sinopec’s crude oil production during the first three quarters inched up 1.9% year over year to 34.93 million barrels, while natural gas volumes increased 45.0% to 8.87 billion cubic meters. Owing to a substantial increase in crude oil prices, the Exploration and Production (E&P) segment’s operating profit was 40.838 billion yuan ($6.0 billion), indicating a substantial increase from the first three quarters in 2009.
Sinopec’s domestic peer, CNOOC Ltd. (CEO) reported impressive first three quarters result with production leaping 43.7% year over year to 237.7 million barrels of oil equivalent (MMBoe).
The company’s Refining Business recorded crude oil processing volumes of 154 million tons (a 14.4% year-over-year increase) and production output of refined oil products of 9.225 million tons (a 10.3% year-over-year increase). However, operating profit from the refining business declined 60.6% year over year to 8.491 billion yuan ($1.23 billion).
The Marketing and Distribution segment sold 104.35 million tons of refined oil products, reflecting a 16.5% year-over-year increase, while the segment’s operating profit was 23.306 billion yuan ($3.43 billion), up 4.2% from the corresponding 2009 period.
The output of ethylene from the Chemicals segment reached 6.61 million tons. Operating profit from this segment decreased 27.3% year over year to 10.393 billion yuan ($1.53 billion).
Crude oil price realization in the period was 3,411 yuan ($501.8) per ton, representing a 52.3% increase from the year-earlier level. Realized natural gas price climbed 17.9% year over year to 1,132 yuan ($166.5) per thousand cubic meters.
Capital expenditures in the nine-month period totaled 55.822 billion yuan ($8.21 billion), out of which expenditures on exploration and exploitation stood at 25.572 billion yuan ($3.76 billion). In the Refining segment, Sinopec spent 8.787 billion ($1.29 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 13.326 billion yuan ($1.96 billion). Capital expenditures in the Chemicals segment totaled 7.145 billion yuan ($1.05 billion), mainly due to the ethylene project in Zhenhai and Tianjin.
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.
Though the company is trying to build a better position in the E&P space, Sinopec has been lagging its domestic peers primarily due to its exposure to the heavily regulated downstream sector and its relatively weak upstream asset base.
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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