Sinopec Second-Quarter Rises to Record on Fuel Prices
Aug. 23 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, posted a record quarterly profit and forecast a more-than-50 percent gain in nine-month earnings as the government eased curbs on fuel prices and demand recovered.
Net income at Sinopec, as China Petroleum is known, climbed to 22 billion yuan ($3.22 billion) in the three months ended June 30, according to calculations made by Bloomberg News by subtracting first-quarter results from six-month earnings announced today. That’s more than the 15.8 billion-yuan median estimate of four analysts and the highest quarterly profit since Sinopec first sold shares in Shanghai in 2001.
The gain contrasts with earnings declines at Royal Dutch Shell Plc and Exxon Mobil Corp., the world’s biggest oil companies, after the global recession cut consumption in the U.S. and Europe. China has adjusted fuel tariffs five times this year, compared with twice in 2008, to reflect changes in crude prices and assure refiners a profit. The policy shift helped Sinopec end at least four years of refining losses.
“Investors were expecting good results from the company, but these are better than expected and they will be very favorably received,” said Grace Liu, an analyst at Guotai Junan Securities Co. in Shenzhen, who has a “buy” rating on Sinopec stock. “It’s due to the changes in the pricing mechanism which has really helped Sinopec.”
Profit Increase
Profit rose more than 13-fold from 1.62 billion yuan a year earlier, calculated by subtracting first-quarter profit Sinopec reported in April last year from the restated earnings for the first six months of 2008 announced today. Based on unrevised figures, earnings rose 10 times from 2.2 billion yuan. Sinopec didn’t say if the restatement included a change in the first-quarter profit reported last year. Spokesman Huang Wensheng couldn’t be reached for comments on his mobile phone.
Beijing-based Sinopec, supplier of 80 percent of China’s fuel needs, has gained 48 percent in Hong Kong trading this year and is the best performer on the Bloomberg World Oil & Gas Index. PetroChina Co., the world’s most valuable company, has climbed 27 percent, while Shell and Exxon have fallen as lower fuel demand and prices reduced profit. Sinopec stock gained 0.3 percent to HK$6.92 on Aug. 21.
China has raised prices of fuels such as gasoline and diesel by as much as 25 percent this year under a new pricing system introduced in December.
Pricing Mechanism
“Since 2009, domestic oil product pricing mechanism reform has turned refining business from a loss to profit,” the company said in a statement to the exchange. China’s demand for gasoline, diesel and kerosene fell 1.4 percent between April and June, narrowing from an 8.5 percent decline in the first quarter, Sinopec said.
The National Development and Reform Commission, China’s top economic planner, said on May 8 the government will ensure a “normal profit” for refiners when crude trades below $80 a barrel. Refining margins will be reduced if crude trades between $80 and $130, the NDRC said.
Crude futures in New York averaged less than $60 a barrel, down 52 percent from a year earlier, the biggest second-quarter drop on record. Oil is currently trading at around $73 a barrel.
Sinopec said today it expects crude oil prices to rise in the second half from the first six months and domestic fuel demand to maintain steady growth.
Output Targets
It plans to more than double its annual domestic natural gas production to about 17 billion cubic meters in 2011 from 2008 levels, according to Bloomberg calculations based on the company’s targets in its three-year plan provided in a filing to the Shanghai stock exchange today.
Its annual domestic crude oil production may rise to 43 million tons and oil processing volume may climb to 202 million tons, it said. The company targets 135 million tons in oil- product sales in 2011, Chairman Su Shulin said in the statement.
Sinopec’s first-half net income rose more than four-fold to 33.2 billion yuan, beating a 27 billion-yuan median estimate in a Bloomberg survey of four analysts. Sales fell 27 percent to 534 billion yuan.
Operating profit at its refining division climbed to 19.9 billion yuan from a loss of 46.5 billion yuan, the company said.
Last year, operating losses from refining surged to 102 billion yuan from 13.7 billion yuan in 2007, as oil soared to a record $147.27 a barrel in July and government price caps prevented Sinopec from passing on higher costs to customers.
Government Spending
Sinopec gets almost all its revenue from refining and the sale and distribution of fuels. Oil production accounted for just over 2 percent of sales, according to its 2008 annual report. The company imports about 80 percent of the crude it processes.
The government’s 4 trillion yuan spending has helped to boost domestic demand, Sinopec said today. The Chinese economy grew 7.9 percent in the second quarter, accelerating from a 6.1 percent expansion in the first three months. Industrial production advanced 10.7 percent in June.
Higher profit has encouraged Sinopec to embark on an expansion by increasing refining capacity and oil supplies. The company boosted spending on refining projects by 38 percent to 5.3 billion yuan while Sinopec’s exploration and production capital spending fell by 7 percent to 19.4 billion yuan in the first six months, according to today’s statement.
Chairman Su Shulin said the company will accelerate its “go global” strategy.
Overseas Acquisitions
Parent company China Petrochemical Corp. said on Aug. 18 it had concluded the C$8.3 billion ($7.7 billion) acquisition of Addax Petroleum Corp. to secure reserves in Iraq and Africa. China Petrochemical has assets in Russia, Angola, Ecuador, Australia, Canada, Kazakhstan and Myanmar.
Sinopec’s parent completed the purchase of Tanganyika Oil Co. for about $1.8 billion in December. Vancouver-based Tanganyika holds stakes in two Syrian production-sharing agreements covering the Oudeh and Tishrine/Sheikh Mansour blocks after expanding from Tanzania in 1996.
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