Sinopec Says Profit to Surge on Fuel Prices, Oil Cost

By Wang Ying and John Duce

March 30 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, said first-quarter profit may surge more than 50 percent after the government relaxed fuel-price controls and crude oil costs fell.

Net income soared 98 percent to 13.3 billion yuan ($2 billion) in the fourth quarter, the biggest gain since 2007, according to Bloomberg calculations based on annual figures released in Hong Kong yesterday. Full-year profit fell 47 percent to 29.8 billion yuan, beating the 25 billion yuan median estimate of 21 analysts.

Profit is set to rise after the government assured refiners a profit and crude oil futures in New York slumped 65 percent from a July record. A new mechanism for setting gasoline and diesel prices will end “years of losses” at refineries, the Beijing-based company, known as Sinopec, said in a statement.

“Refining and marketing is Sinopec’s strength and they are making money again in this area,” said David Johnson, a Hong Kong-based energy analyst at Macquarie Group Ltd. “The prospects for this year are much more positive.”

Sinopec spokesman Huang Wensheng couldn’t be reached on his mobile phone to confirm the fourth-quarter figure derived by subtracting nine-month earnings from the full-year result. Earnings in the first quarter may rise from 6.7 billion yuan a year earlier, Sinopec said yesterday.

Profit Forecast

Profit in 2009 may surge to 46.2 billion yuan, according to the median estimate of nine analysts.

Sinopec fell 0.8 percent to HK$4.94 at 11:50 a.m. in Hong Kong trading as Asian stocks retreated after commodities prices fell and on speculation a recovery for banks will be delayed. The benchmark Hang Seng index declined 2.3 percent.

The shares have gained 12 percent in Hong Kong trading after China raised fuel prices by as much as 5 percent starting March 25.

Eighteen out of 24 analysts in a Bloomberg survey recommend buying Sinopec shares, compared with 11 for Cnooc, China’s third-largest oil company. Ten out of 23 rate shares of larger PetroChina a “buy.”

“Some investors who would never have considered Sinopec before are now interested because there is evidence that Chinese refiners profit margins are assured,” said Graham Cunningham, an energy analyst at Citigroup Inc. based in Hong Kong.

Sinopec said capital expenditure will rise 4 percent to 111.8 billion yuan this year. Spending on refining will increase about 35 percent to 16.8 billion yuan while that on exploration will decline by 4.6 percent to 55 billion yuan, it said.

‘Appropriate Profit’

“Sinopec will be able to make full use of its advantages in marketing and management, turning its refining operations into a major profit contributor,” the company said.

The government in December replaced a guidance band for retail fuel prices with a market-based ceiling that includes the cost of crude oil, taxes and an “appropriate profit” for refiners.

Gasoline and diesel prices will be adjusted when crude costs change by more than 4 percent over 22 straight working days, and refiners will be allowed a profit margin of at least 5 percent, said Zhou Jiping, president of rival PetroChina Co.

Sinopec will gain more from the relaxation than PetroChina or Cnooc Ltd., which draw most of their revenue from oil production.

PetroChina, the world’s second-largest company by market value, said last week 2009 may be its “most challenging” year after refining losses and a slump in crude oil prices led to its first annual profit drop since 2001.

Refining Losses

About 76 percent of Sinopec’s revenue comes from refining and marketing and distributing petroleum products, according to the company’s 2007 annual report. Only two percent is from oil exploration and production.

Operating losses from refining surged to 102 billion yuan last year from 13.7 billion yuan in 2007, Sinopec said. The company received 50 billion yuan in government subsidies.

Sinopec’s windfall tax payment increased by 21.6 billion yuan, it said without giving a figure for the year. Chinese oil producers pay a tax on revenue from crude sold above $40 a barrel under a levy introduced in March 2006.

The refiner’s unlisted parent, China Petrochemical Corp., said on March 23 its first-quarter performance is “better than expected” and the country’s demand for some oil products is recovering.

‘Robust’ Demand

China’s economy expanded 6.8 percent in the fourth quarter, the weakest pace in seven years. Growth for the full year was 9 percent, down from 13 percent in 2007. Central bank Governor Zhou Xiaochuan said last week that leading indicators in China are pointing to an economic recovery.

“Despite a global economic slowdown, the growth of the Chinese economy is only partially influenced,” Sinopec said in yesterday’s statement. “Basic domestic demand for oil and petrochemical products remains robust.”

Oil processing at Sinopec’s refineries may increase 8.9 percent to 184 million tons this year, the company said. Sinopec plans to boost crude oil output by 1.4 percent to 42.4 million tons and natural gas production by about 20 percent to 10 billion cubic meters.

To contact the reporters on this story: Wang Ying in Hong Kong at Ywang30@bloomberg.net; John Duce in Hong Kong at Jduce1@bloomberg.net