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Sinopec’s Net Beats Estimates on Fuel Price Increases

China Petroleum & Chemical Corp.'s second-quarter profit rose 20 percent, beating analyst estimates, after state fuel price increases helped Asia's biggest oil refiner cut losses from producing gasoline and diesel.

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Net income climbed to 12.12 billion yuan ($1.5 billion) from 10.1 billion yuan a year earlier, based on figures the company released today. Sinopec, as Beijing-based China Petroleum is known, was expected to post profit of 11.2 billion yuan, according to eight analysts surveyed by Bloomberg News.

Sinopec's profit is tied to state controls on energy pricing because the refiner supplies 80 percent of the fuels sold in the world's fastest-growing major economy. The company said it plans to accelerate drilling for natural gas, use cheaper grades of oil at its plants and expand output of higher-priced fuels and chemicals to stem refining losses and boost exploration earnings. Sinopec Group and partner Rosneft this month started drilling a well in the Sakhalin-3 oil and gas project.

The government has "to make sure that the refiners can make money,'' said Liu Yang, who helps manage $3 billion of Asian assets at Atlantis Investment Management in Hong Kong. "The liberalization of oil retail pricing is underway and this is the trend, to match international prices.''

Sinopec's Hong Kong-traded shares have gained 17 percent this year, lagging behind the 40 percent advance by PetroChina Co., the nation's biggest oil company, and the 29 percent increase in Cnooc Ltd., the third-biggest. PetroChina said Aug. 23 first-half profit rose 29 percent to a record 80.68 billion yuan. Cnooc reports tomorrow.

First Half

Net income in the six months ended June 30 rose 8.9 percent to 21.4 billion yuan, or 0.247 yuan a share, from 19.65 billion yuan, or 0.227 yuan, a year earlier, the company said in a statement. Analysts had a median first-half profit estimate of 20.5 billion yuan. Bloomberg News derived the second-quarter profit and estimate figures.

Sales and other operating revenue climbed 35 percent in the first half to 493.1 billion yuan. Second-quarter revenue rose 37 percent to 265.4 billion yuan, according to derived numbers.

The company sold crude oil at an average realized price of 3,309.71 yuan a metric ton in the first half, an increase of 43 percent from a year earlier. That contributed to a 48 percent jump in exploration and production income to 65.5 billion yuan.

Sinopec paid 3.65 billion yuan in windfall taxes on oil sales in the six months, Chairman Chen Tonghai told reporters in Hong Kong. Full-year payments may reach 10 billion yuan, he said. China introduced the payments in March after oil prices soared.

Refining Loss

Sinopec's first-half refining loss widened to 16.6 billion yuan from 1.296 billion yuan a year earlier, the company said. The losses are likely to continue for the rest of the year, Chen said, with their extent depending on the pace of state price reforms and whether there are further increases.

"They really suffered in the refining side,'' Lorraine Tan, director of research at Standard & Poor's Investment Services in Singapore, said today. 'I don't think the government will have refiners suffer losses all the way through, otherwise, you won't get the capacity increases that they want.''

China in May increased the price of gasoline by 10.6 percent, diesel prices by 12.3 percent, and jet fuel by 10.3 percent, after raising prices in March and July to help refiners cover the higher cost of crude oil. The state allows refiners a range of 8 percent above or below its guideline price.

Chen was still unable to match profit gains from refining at Valero Energy Corp., Exxon Mobil Corp. and BP Plc, which operate without China's price curbs. Valero Energy, the largest U.S. oil refiner, said Aug. 1 second-quarter profit more than doubled to a record $1.9 billion as gasoline and diesel prices climbed.

Exxon, BP

Exxon Mobil, the world's biggest refiner, said July 27 profit from processing crude into fuels rose 23 percent to $2.49 billion. BP's refining and marketing profit jumped 46 percent to $1.86 billion, Europe's second-largest oil company by market value said July 25.

PetroChina's first-half loss from refining widened to 13.9 billion yuan from 5.9 billion yuan a year earlier, the company said Aug. 23. Fuel prices need to rise about another 25 percent to halt the losses, Chief Financial Officer Wang Guoliang said.

Sinopec plans capital spending of as much as 70 billion yuan each year on fixed assets, Chen said. The company intends to invest 65 billion yuan over three years developing the Puguang gas field in Sichuan province. Fuel from the field will supply Shanghai, the nation's commercial capital, and the provinces of Zhejiang and Jiangsu through a pipeline with annual capacity of 12 billion cubic meters, he said.

Gas Reserves

Possible gas reserves at Puguang stand at 590 billion cubic meters, Chen said. Of this, 322 billion cubic meters are proved. The government has yet to verify the reserves, he said.

The company plans to produce 20.16 million tons of crude oil and 3.5 billion cubic meters of natural gas in the second half and refine 73.3 million tons of oil (2.9 million barrels a day).

Sinopec estimates oil production will reach 42 million metric tons in 2008, with natural gas output projected at 10 billion cubic meters, it said today.

Sinopec will increase spending on exploration and production should "significant discoveries'' be made, in pursuit of better returns, Chen said and "doesn't rule out'' buying Russian fields owned by parent China Petrochemical Corp.

China Petrochemical, or Sinopec Group, agreed to pay $3.5 billion for 97 percent of a Russian affiliate of BP Plc, OAO Udmurtneft, in a joint purchase with Russia's OAO Rosneft, state news agency Xinhua reported July 15. Udmurtneft pumps 115,000 barrels a day of oil, about 4.5 percent of China's crude oil imports last year.

Sakhalin

Sinopec Group and partner Rosneft this month started drilling a well in the Sakhalin-3 oil and gas project in eastern Russia, Chen said.

Fuel sales may reach 120 million tons in 2008, of which 75 million tons will be retail sales. The company expects to be able to process 187 million tons of crude oil in 2008 (3.7 million barrels a day) and to produce 7.1 million tons of ethylene.

Sinopec has crude oil inventories of 9 million tons and oil- product stores of 4 million tons. That's in line with Sinopec's practice of keeping 20 days of oil processing capacity stockpiled and 10 to 15 days' supply of refined products, he said.

Sinopec increased refining and oil and gas output in the first half to meet demand in an economy that expanded 10.9 percent in the six months and 11.3 percent in the second quarter, the fastest pace in a decade.

Oil processing increased 5.3 percent to 71.7 million metric tons (527 million barrels), the company said July 18. Crude production rose 3.1 percent to 140.9 million barrels and gas output gained 20 percent to 126.2 billion cubic feet.

The company lost 93 yuan on each ton of crude it processed in the first six months, compared with a profit of 141 yuan a ton a year earlier. Sinopec needs prices of the fuel it sells to be $3 a barrel above its purchasing cost of crude oil to "break even,'' Chen said.

Sinopec will pay a half-year dividend of 0.04 yuan a share, unchanged from a year earlier.

© Bloomberg

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