A Solid First Half for Sinopec

China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported its interim results for the six-month period ended June 30, 2010. Earnings per share in the period were 0.403 yuan ($5.91 per ADS), up 6.1% year over year.

Net income in the period increased 5.0% from the comparable 2009 level to 34.9 billion yuan ($5.1 billion). The increase can be attributable to robust results from the Exploration and Production segment.

Sinopec’s domestic peer, CNOOC Ltd. (CEO) reported an impressive first half with net profit leaping 109.6% year over year to 25.99 billion yuan ($3.8 billion).

Operational Performance
Sinopec’s crude oil production during the reported period rose nearly 0.05% year over year to 149.19 million barrels, while natural gas volumes increased 40.7% to 200.55 billion cubic feet. Owing to a substantial increase in crude oil prices, the Exploration and Production segment’s operating profit was 22.0 billion yuan ($3.2 billion), indicating an increase of 299.7% from the comparable period in 2009.

The company’s refining business recorded crude oil processing volumes of 101.45 million tons (a 16.7% year-over-year increase) and production output of refined oil products of 60.52 million tons (a 12.0% year-over-year increase). However, operating profit from the refining business declined 71.4% year over year to 5.7 billion yuan ($0.8 billion), as the increase in crude oil price outweighed the sales price of refined products.

The Marketing and Distribution segment sold 68.15 million tons of refined oil products, reflecting an 18.1% year-over-year increase, while the segment’s operating profit was 14.5 billion yuan ($2.1 billion), up 15.5% from the corresponding 2009 period.

The output of ethylene from the Chemicals segment reached 4.2 million tons. Operating profit from this segment decreased 14.5% year over year to 8.3 billion yuan ($1.2 billion).

Crude oil price realization in the period was 3,422 yuan ($502) per ton, an 89.3% increase from the year-earlier level. Realized natural gas price climbed 10.2% year over year to 1,059 yuan ($155) per thousand cubic meters.

Capital expenditures in the six-month period totaled 34.796 billion yuan ($5.1 billion), out of which expenditures on exploration and exploitation stood at 15.348 billion yuan ($2.3 billion). In the Refining segment, Sinopec spent 4.875 billion ($715 million) for the product quality upgrades, refinery revamping projects to process low grade crude, as well as storage facilities and pipeline construction projects.

Capital expenditures in the Marketing and Distribution segment were 7.659 billion yuan ($1.1 billion). Capital expenditures in the Chemicals segment totaled 6.543 billion yuan ($960 million), mainly due to the completion of the ethylene project in Zhenhai, along with the ethylene project in Wuhan that progressed well.

Guidance
For the second half of 2010, Sinopec guided production of 21.54 million tons of crude oil and 6.32 billion cubic meters of natural gas. The company also intends to process 102 million tons of crude oil and plans 68.15 million tons of total domestic sales volume of oil products.

Our View
China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players that can meet the country’s fast-growing energy needs. Being one of the two integrated oil companies in China, Sinopec is well positioned to capitalize on these favorable trends.

For the second half of 2010, Sinopec intends to adjust its business structure, create marketing channels, control costs and record a robust performance. However, we remain concerned about the company’s exposure to the heavily regulated downstream sector.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

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