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Sinopec Beats EPS Estimate

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China Petroleum and Chemical Corporation (SNP - Analyst Report), aka Sinopec, recorded earnings per share of 0.845 yuan ($13.05 per ADS) in 2011, up 2.1% year over year. Sinopec also beat the Zacks Consensus Estimate of $12.53 per ADS.

The company reported fiscal 2011 net income of 71.7 billion yuan (US$11.08 billion), up 1.4% year over year. The increase can be attributable to domestic economic growth, and most importantly higher prices for petroleum and related products.

Operational Performance

During the year ending December 31, 2011, Sinopec’s crude oil and natural gas production upped 1.6% year over year to 407.91 million barrels of oil equivalent. Natural gas volumes surged 17.1% to 517.07 billion cubic feet, while domestic crude oil production increased 0.4% year over year to 303.37 million barrels. However, overseas production of crude oil dropped drastically due to the impact of overhaul of offshore assets.

A sharp rise in crude oil and natural gas prices as well as an increase of natural gas sales volume lifted the Exploration and Production (E&P) segment’s operating profit by 51.9% over the prior-year to 71.6 billion yuan (US$11.06 billion).

On a year-over-year basis, crude oil prices jumped 40.0% to US$111.27 per barrel, during 2011.

The company’s refining business recorded crude oil processing volumes of 217.0 million tons (up 3.0% year over year) and refined oil products output of 128 million tons (up 2.9% year over year). in 2011, the segment registered operating loss of 35.8 billion yuan (US$5.53 billion).

The Marketing and Distribution segment sold 162.0 million tons of refined oil products, reflecting an 8.8% year-over-year increase. The segment’s operating profit was 44.7 billion yuan (US$6.9 billion), up 45.3% from the comparable period last year.

The output of ethylene from the Chemicals segment was 9.894 million tons, up 9.2% from the year-ago level. Operating profit from this segment experienced a substantial lift of 78.1% year over year to 26.7 billion yuan (US$4.13 billion).

Capital Expenditure

Capital expenditures for 2011 totaled 130.2 billion yuan (US$20.12 billion), of which 58.749 billion yuan (US$9.1 billion) was spent on exploration at projects in key oilfields, including Shengli Beach Oilfield, northwest Tahe Oilfield, natural gas exploration and development in northeastern Sichuan and the Shandong LNG project.

In the Refining segment, Sinopec spent 25.77 billion ($3.98 billion) for product quality upgrades, overhauling the refinery projects in Sinopec Shanghai Petrochemical and Jinling Petrochemical Corp, as well as for putting into operation the Rizhao-Yizheng crude oil pipeline.

Capital expenditures in the Marketing and Distribution segment were 28.517 billion yuan (US$4.41 billion). Capital expenditures in the Chemicals segment totaled 15.015 billion yuan ($2.32 billion), mainly due to the construction of Wuhanethylene plant, Zhongyuan methanol-to-olefins feedstock projects, the Yanshan butyl rubber project and the Yizheng butylene glycol project.

Outlook

A step-up in China’s economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players rallying to 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.

We believe the company is trying to build a better position in the E&P space and expect 2012 to be a profitable year owing to the higher contribution from upstream activities. The company made new discoveries in the matured fields in eastern China, the western Sichuan Depression, the northern slope of Tazhong, new areas in Songnan, southeast offshore Hainan Island and the northern margin of the Jungar Basin.

Notably, the company has accelerated the exploration and development of unconventional oil and gas. In oil-field development and production, Sinopec has made advances in improving the reserve development ratio, oil recovery rate and unit well productivity, maintained stable production of eastern oilfields and expedited the building of the production capacity of western oilfields.

However, we remain concerned about the company’s overseas upstream volume, which experienced a downfall in the year 2011 due to the overhaul of offshore production machinery. Volatility in global crude price and continued price controls on refined oil products in domestic market pose further risks to the company.

The company, which competes with CNOOC Ltd (CEO - Analyst Report), holds a Zacks #3 Rank (short-term Hold rating). For the long term, we maintain our Neutral recommendation on the stock.

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