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Bear of the Day

The perceived health of the Chinese economy has improved greatly in recent months, as many investors are once again bullish on the huge emerging market. Not every stock in the country looks to be able to continue to ride this wave of optimism though, as some bearish clouds are starting to appear for China Petroleum and Chemical Corporation in particular.

SNP is one of the largest oil and gas firms in China and the world, with reserves of nearly 2.9 billion barrels of crude oil and 6.7 trillion cubic feet of natural gas. The firm also has an increasingly large overseas operation, in both developed markets as well as in the Near East. Yet despite these recent acquisitions and large reserves, the earnings picture isn’t exactly great for the company.

Full year estimates are pricing in negative earnings growth in the -16% range, though they are also expecting a rebound in the following year. Still, the Most Accurate Estimate and Zacks Earnings ESP for both this year and next are negative, suggesting a broad analyst trend to the downside.

Thanks in part to this, SNP currently has a Zacks Rank of 5 or ‘Strong Sell’, a huge change from just a week ago when the stock had a Zacks Rank of 3 or ‘Hold’. The firm also receives a Zacks Recommendation of ‘Underperform’ implying a weak longer term outlook as well.

If that wasn’t enough, the Zacks Industry Rank for this firm is also in the bottom quartile, while oil in general is also seeing some weakness from the Zacks Industry Rank. Not a single integrated emerging market oil firm has a Rank better than 3, while the oil-international integrated category is also in the bottom third, suggesting widespread uncertainty over the global oil market.

While it is true that the PE is rather robust at 8.9, several other key measures haven’t been as good. The company’s operating margin has been under pressure for a decade, while its return on assets is a meager 5% for the trailing twelve months, so prospects certainly haven’t been trending in the right direction.

Bottom Line

SNP has seen a solid run in the past few weeks thanks to rebounding demand for Chinese securities. Don’t buy into it though, as this company is seeing a deteriorating earnings picture and some troubling figures when looking at its margins and ROA. Instead, consider some of the more domestic-focused energy plays until this oil giant can turn things around and get out of Zacks’ Sell territory.

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