Sinopec's EPS Lags Y/Y, Rev Improves

China Petroleum and Chemical Corporation ( SNP - Analyst Report ) , also known as Sinopec, reported third quarter 2012 net income of 18.25 billion yuan (US$2.88 billion) and earnings per share of 0.198 yuan ($3.13 per ADS), down approximately 7.5% and 10.0% year over year, respectively. Slower domestic economic growth was largely responsible for the decline.

However, third quarter revenue improved 5.43% to 676.7 billion yuan from 641.8 billion in the year-earlier period, mainly attributable to higher contributions from the upstream exploration and production segment.

Operational Performance

During the nine-month period ending September 30, 2012, Sinopec’s crude oil production expanded 2.3% year over year to 245.0 million barrels, while natural gas volumes spiked 14.7% to 438.4 billion cubic feet. Domestic crude oil production increased marginally by 1.0% year over year to 228.9 million barrels though overseas volumes increased considerably by 27.0% year over year.

The company’s Refining business recorded crude oil processing volumes of 4,390 thousand barrels per day (up 0.5% year over year) and refinery throughput of 98.39 million tons (up 3.1% year over year).

The Marketing and Distribution segment sold 128.34 million tons of refined oil products, reflecting a 5.6% year-over-year increase.

The output of ethylene from the Chemicals segment was 7.024 million tons, down 4.5% from the year-ago level.

Capital Expenditure

Capital expenditures for the first three quarters of 2012 totaled 83.448 billion yuan, of which 34.999 billion yuan was spent on exploration 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 16.829 billion on product quality upgrades, refinery projects overhaul at Sinopec Shanghai Petrochemical and Jinling Petrochemical Corp.

The Marketing and Distribution segment expended 20.334 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 10.496 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 be an overhang on its operations as natural declines become pricier to counterbalance.

Sinopec remains highly exposed to government directed price controls owing to its large downstream refining and petrochemicals operations compared to its arch rival PetroChina Ltd. ( PTR - Analyst Report ) − China's largest listed oil company by capacity.

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. Longer term, we are maintaining our Neutral recommendation on Sinopec, but it retains a short-term Zacks #2 Rank (Buy rating).