Sinopec Shares Rise as Net Beats Estimates, Oil Falls

By Wang Ying and Winnie Zhu
Enlarge Image/Details

Aug. 25 (Bloomberg) -- China Petroleum & Chemical Corp., Asia's largest oil refiner, rose in Hong Kong trading after it posted earnings that beat analysts' estimates and crude oil prices dropped the most in more than three years.

Sinopec, as China Petroleum is known, gained 3 percent to HK$7.82. First-half net income fell 77 percent to 8.26 billion yuan ($1.21 billion), the refiner said yesterday, beating the median estimate of 7 billion yuan in a Bloomberg analyst survey. The price of oil, Sinopec's biggest cost, fell 5.4 percent in New York on Aug. 22.

The refiner's shares have retreated 34 percent this year, compared with a 24 percent decline in the city's benchmark Hang Seng Index, as government curbs on fuel prices prevented the company from passing on record crude oil costs to consumers. China controls fuel prices to limit their impact on inflation in the world's fastest-growing major economy.

The earnings ``came in marginally ahead of our expectation, we think that the market will likely view them positively,'' Cheng Khoo and Gordon Wai, Hong Kong-based analysts at Lehman Brothers Holdings Inc, said in a report today. ``The worst is likely over for Sinopec as crude oil prices have declined from a peak of $147 a barrel. We think that crude prices are likely to continue easing through early 2009.''

Oil's $6.59 decline to $114.59 in New York on Aug. 22 was the biggest in percentage terms since Dec. 27, 2004, and in dollar terms since Jan. 17, 1991, when U.S.-led forces expelled Iraq from Kuwait. The October contract traded at $115.11 at 4:23 p.m. Hong Kong time, up 66 percent from a year ago.

Refining Loss

In the second quarter, Sinopec's profit slumped 87 percent to 2.19 billion yuan, according to Bloomberg calculations made from the first-half figures.

Sinopec's refining business lost 46 billion yuan in the first half, compared with a profit of 5.73 billion yuan a year earlier, it said in a separate statement to the Shanghai stock exchange yesterday. Refining costs reached 460 billion yuan, 63 percent of all expenses.

The company lost 752 yuan to process each metric ton of crude oil in the first six months, compared with a profit of 265 yuan a ton during the same period of 2007, it said.

``The second-half should look a little better, as crude should ease and the government may further increase fuel prices,'' Yin Xiaodong, an analyst with Citic Securities Co., said by phone from Beijing yesterday.

Spending Plan

First-half total capital expenditure was 36.5 billion yuan, of which exploration and development spending stood at 21 billion yuan, it said. The company said it will speed up explorations in ``key regions'' such as Tahe and northeastern Sichuan in the second half.

Profit in the first three quarters may fall by more than 50 percent because of crude oil costs and state price controls on fuels, Sinopec said.

``We see significant value in Sinopec's asset in the longer term, realizing however, that this could take a while,'' Morgan Stanley analyst Sara Chan said in a report today. ``Until then, the stock price could see significant volatility, driven by oil price movement and news flow related to domestic product price reform. Going into the second half, we do not expect significant improvement in its earnings trends.''

To contact the reporter on this story: Wang Ying in Beijing at wang30@bloomberg.net; Winnie Zhu in Shanghai at wzhu4@bloomberg.net