China Petroleum and Chemical Corporation ( SNP - Analyst Report ) , aka Sinopec, reported first quarter 2012 earnings per share of 0.153 yuan ($2.42 per ADS), down 35.2% year over year. Net income decreased 35.0% from the prior-year level to 13.41 billion yuan (US$2.120 billion). Slower domestic economic growth was largely responsible for the decline. Moreover, increases in the price of international crude oil – amid government caps on fuel prices – prevented the company from fully passing on spiraling costs to consumers, thereby hurting refining margins.

Operational Performance

During the period ending March 31, 2012, Sinopec’s crude oil production upped 4.5% year over year to 81.53 million barrels, while natural gas volumes surged 11.8% to 143.18 billion cubic feet. Domestic crude oil production increased marginally by 1.7% year over year to 75.78 million barrels though overseas volumes increased considerably by 63.4% year over year.

A sharp rise in crude oil and natural gas prices as well as an increase in natural gas sales volume lifted the Exploration and Production (E&P) segment’s operating profit by 48.8% over the prior-year to 19.551 billion yuan (US$3.093 billion).

The company’s refining business recorded crude oil processing volumes of 55.410 million tons (up 2.1% year over year) and refined oil products output of 32.867 million tons (up 5.0% year over year). However, the segment registered an operating loss of 9.172 billion yuan (US$1.451 billion) as international crude oil price jumped to new high since 2008 financial crisis amid domestic control over the refined oil products prices.

The Marketing and Distribution segment sold 41.350 million tons of refined oil products, reflecting a 4.3% year-over-year increase. The segment’s operating profit was 10.277 billion yuan (US$1.626 billion), up 12.2% from the comparable quarter last year.

The output of ethylene from the Chemicals segment was 2.4551 million tons, up 3.9% from the year-ago level. Operating profit from this segment dropped 85.9% year over year to 1.309 billion yuan (US$0.207 billion). The underperformance was mainly attributable to the rise in the price of chemical raw materials such like naphtha, as well as the decreasing price of global chemical products.

Price Realization

On a year-over-year basis, crude oil prices jumped 23.8% to US$106.10 per barrel and natural gas prices surged 3.3% to US$5.64 per thousand cubic feet, during the first quarter of 2012.

Capital Expenditure

Capital expenditures for the first quarter totaled 18.388 billion yuan, of which 6.312 billion yuan was spent on exploration at projects in key oilfields, including Shengli shallow water oilfield, northwest Tahe Oilfield, Ordos oil and gas fields, natural gas exploration and development in Sichuan and the Shandong LNG project.

In the Refining segment, Sinopec spent 2.864 billion for product quality upgrades, overhauling the refinery projects in Sinopec Shanghai Petrochemical and Jinling Petrochemical Corp, as well as the construction of Huangdao-Lanshan crude oil pipeline.

Capital expenditures in the Marketing and Distribution segment were 6.340 billion yuan for the construction and acquisition of gas stations on highways, in important cities and newly planned regions. Capital expenditures in the Chemicals segment totaled 2.557 billion yuan, mainly due to the construction of the Wuhanethylene plant, the Yanshan butyl rubber project and the Yizheng butylene glycol project.

Outlook

We remain apprehensive about the volatile oil and gas fundamentals and a weak macro environment. We believe that Sinopec’s matured domestic oil fields and the associated rise in costs will continue to overhang on its operations as natural declines become pricier to counterbalance.

We also remain skeptical about the company’s earlier overall 2012 guidance, which is weak, and reflects slower growth in China. For 2012, while Sinopec had guided for improved upstream growth, refining, marketing and petrochemical output will likely be flat-to-slightly lower. The company expects to face challenges in 2012 due to complex geopolitical tensions and higher oil prices internationally. Domestic economic growth is experiencing a downward pressure.

The company, which competes with CNOOC Ltd ( CEO - Analyst Report ) , holds a Zacks #4 Rank (short-term Sell rating).