Monday, May 20, 2013

Turnaround of Asia’s Largest Refiner

From The Motley Fool dated May 3, 2013

Asia’s refining giant China Petroleum and Chemical Corp (NYSE: SNP), more commonly known as Sinopec, has recently released its quarterly results in which its profits increased by 24% due to a significant and much awaited turnaround of its refining business. The Chinese authorities have been keeping a lid on oil prices to curtail inflation, but they have been moving towards more market friendly fuel pricing policies, which will change the fortunes of Chinese refiners.
Sinopec and the Asian oil behemoth PetroChina (NYSE: PTR) have been incurring massive refining losses as they are required to sell their output at prices determined by the state. Sinopec gets more than 60% of its revenues from refining, while PetroChina gets 42%.
Sinopec’s refining margins increased considerably, as fuel prices have seen an overall increasein the last nine months (Beijing implemented two price cuts and increased prices three times in this period), while inflation has been at its lowest levels since 2010.
Sinopec: Earnings Release
The company’s net profit for the quarter increased by 24.4% to $2.7 billion, as its total turnover went up by 3.6% to $112.8 billion. Sinopec missed analysts’ estimates by $300 million, according to data provided by Bloomberg. The significant increase in income was primarily driven by the refining segment, which swung from a loss of $1.49 billion in the same quarter last year to a profit of $357.5 million. However, the company’s earnings in all other operating segments have dropped. The exploration and production segment, which makes the largest contribution to the bottom line, has reported a 17% decline in earnings to $2.63 billion. Similarly, income from Marketing & Distribution has fallen by 11.2% to $1.48 billion. The Chemicals segment has reported an enormous decline in income from $212 million to just $26.6 million.
During the quarter Sinopec’s refining arm processed 58.7 million metric tons of crude oil, which is an increase of 5.9% from last year. The operating costs in this segment increased from $3.06/barrel to $3.24/barrel, but the refining margins rose from just $0.61/barrel in Q1 2012 to an attractive $5.23/barrel in Q1 2013 as the unit finally became profitable. Light products and refining yields have dropped slightly from the year ago-quarter by 0.27 percentage points to 76.44% and 94.72%, respectively.
In the exploration and production segment, the business was able to increase its oil and gas output, but its effect was offset by the falling realized oil prices. The crude oil production increased slightly by 0.78% to 82.17 million barrels, while natural gas production increased by 13.98% to 163.20 billion cubic feet. Although the realized price of natural gas went up by 3.9% to $5.86/thousand cubic feet, the realized price of oil fell by 6.85% to $98.83/barrel.
On the other hand, PetroChina’s net income fell by 8.2% to $5.84 billion as its crude oil output climbed 1.8% to 231 million barrels; but average realized prices dropped 2.3% to $103.08 per barrel.
Asset Purchase
Sinopec had earlier captured global headlines due to its $3.5 billion bond sale, the largest in Asia in a decade (excluding Japan). In February this year, the business also raised $3.1 billion through private placement. The company is purchasing overseas assets from its parent Sinopec Group to improve its portfolio as it aims to compete with the big boys of this industry such as ExxonMobil (NYSE: XOM)Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-A). About a month ago it revealed that it would buy assets -- including some located in Russia, Columbia and Kazakhstan -- worth $1.5 billion from its parent as it plans to quadruple its proven overseas reserves to 330.2 million barrels.

Stock 6M
Source: Yahoo! Finance
Both ExxonMobil and Chevron have released their quarterly results in the final week of April, in which they managed to beat the Wall Street's earnings expectations but missed revenue estimates. Shell also released its earnings report, in which it too beat the earnings estimates--but the main focus was the WSJ report that revealed that its CEO Peter Voser will retire next year. 
In the last six months, Sinopec’s ADR is up 4.6% while PetroChina is down 7.5%, but the latter is still more expensive than the former. With its current price level, Sinopec offers an extremely attractive yield of 5.4%. Both companies generate almost identical return on asset while Sinopec’s gives a better return on equity. However, the two Chinese stocks are currently more expensive than ExxonMobil, Royal Dutch Shell and Chevron. All of these three oil majors generate significantly higher returns on assets and equities than their Chinese peers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.