Sinopec Expects Higher Profit on Eased Price Controls

By John Duce

April 29 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, said profit may grow more than 50 percent in the first half after the government eased fuel-price controls and crude oil costs dropped from a record.

First-quarter net income jumped 85 percent to 11.2 billion yuan ($1.6 billion) from a year earlier, the Beijing-based company known as Sinopec said in a statement to the Shanghai stock exchange yesterday. Operating profit from refining was 7.3 billion yuan compared with a 25 billion-yuan loss a year earlier.

The Chinese government in December revised a fuel-pricing system to allow refiners to pass on increases in crude oil costs to consumers. China’s economy has shown signs of recovery, helping to boost fuel demand and brighten the company’s prospects, Chief Financial Officer Dai Houliang said today.

“The key question now for the whole of the second quarter is whether the government will allow oil product prices to rise further to reflect crude prices,” said Wang Aochao, an energy analyst at UOB-Kay Hian in Shanghai. “We think demand for gasoline and diesel will pick up in the second quarter as the Chinese economy picks up.”

Sinopec gained as much as 3.8 percent in Hong Kong trading and the stock stood at HK$5.75, a 2.7 percent increase at 10:35 a.m. The Hang Seng Index was up 1.4 percent. The shares have advanced 22 percent since March 29, when the refiner posted 2008 earnings that beat estimates. PetroChina Co., China’s biggest oil company, gained 6 percent in the period.

Oil Exploration

Sinopec will step oil exploration as oil prices may rise later this year, Dai told analysts on a conference call today.

Virtually all of Sinopec’s revenue comes from refining, petroleum products sales and petrochemicals. Only 3 percent is generated by oil and gas exploration and production.

By contrast, about 55 percent of the income of PetroChina was from exploration last year, according to its annual report. PetroChina’s first-quarter profit fell 35 percent after oil prices declined.

Sinopec’s profit fell 47 percent last year before the pricing changes were introduced and it was unable to pass on soaring oil costs to customers. Crude rose to a record $147.27 a barrel last July and has since fallen 66 percent. Fourth-quarter profit gained 98 percent to 13.3 billion yuan.

“Due to the changes in the pricing mechanism our refining business is now making a profit,” Dai said. “This is a dramatic change from last year.”

Sinopec’s net income may rise 59 percent to 47.5 billion yuan this year, according to the median of eight analysts’ estimates compiled by Bloomberg, as China’s stimulus measures help boost economic growth and revive oil demand.

China’s Economy

The nation’s economy is showing signs of recovery after growing at the weakest pace in nearly a decade in the first quarter, as a 4 trillion-yuan stimulus plan spurs factory production and investment. Urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated, according to government reports on April 16.

Sinopec’s capital expenditure will increase 4 percent this year, with spending on refining rising about 35 percent, the company said last month.

Expenditure was about 15.3 billion yuan in the first quarter, of which exploration and development accounted for 7.8 billion yuan and refining 1.6 billion yuan, according to yesterday’s statement. No comparative numbers were given.

Sinopec will be able to take advantage of its strength in marketing and management to turn its refining operations into a major profit contributor, it said last month. The growth of the Chinese economy is only partially influenced by the global slowdown and domestic demand for oil and petrochemical products remains robust, the company said.

Oil Processing

Oil processing at Sinopec’s refineries may increase 8.9 percent to 184 million metric tons this year, the company said. In the first quarter, oil processing reached 40.5 million tons. Oil-product sales fell 12 percent to 26.4 million tons in the three months, yesterday’s statement showed.

Crude production rose 0.6 percent to 10.4 million tons in the first quarter. The company boosted gasoline output by 15 percent while reducing diesel yield by 8.8 percent.

Natural-gas output fell 3.7 percent to 1.98 billion cubic meters in the first three months. Sinopec said the construction of a gas pipeline to deliver the fuel from its Puguang field in the southwestern province of Sichuan to Shanghai will be completed in June.

Sinopec plans to boost crude-oil output this year 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 reporter on this story: John Duce in Hong Kong at Jduce1@bloomberg.net