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Sinopec to Slash Refining Operations on Rising Freight Rates

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China Petroleum & Chemical Corporation or Sinopec (SNP - Free Report) is reportedly under pressure and might reduce oil imports, which will affect its refinery operations. Due to surging freight rates in Asia, the biggest refiner of China is planning to slash crude intakes from November that will likely bring down production at its refineries.

Freight Rate Jumps

The sanctions from the U.S. government on Chinese ships during September-end affected around 300 tankers. As a result, demand for alternative tankers rose significantly. This situation has led to a rise in freight costs from $2.50 per barrel to $10, per Bloomberg. The huge jump in costs weakened Sinopec’s margins from refining operations.

Impact on Operations & Profits

Sinopec is expected to slash processing at its refineries by 1 million tons of oil, due to the rise in costs, in December. The amount reflects 5% of the company’s refining capacity. Notably, fuel demand is expected to rise during the winter and holiday seasons. Moreover, the IMO-2020, which shall come into effect from Jan 1, 2020, will likely increase the demand for cleaner ship-fuels. Hence, the lower processing will hurt the company’s ability to reap profits from the rising demand.

It is to be noted that Sinopec reported earnings per share of 0.259 yuan in first-half 2019, down almost 25% from 0.344 yuan a year ago due to weak refining business, narrowing of the retail spread and lower gross margin at chemical operations. Rise in crude procurement expenses will likely continue to hamper its profit levels in the second half of the year.

The negative effect of the situation can be seen in the earnings estimate revision trend. In the last seven days, analysts have downwardly revised the company’s earnings estimates to $6.97 per ADR from $7.30, indicating a 2.5% decline from the year-ago figure.

Price Performance

Sinopec, a leading Asian integrated energy player, has declined 16.9% year to date against the 2.4% growth of the industry it belongs to.

Zacks Rank and Stocks to Consider

Currently, Sinopec has a Zacks Rank #4 (Sell). Some better-ranked players in the energy space are Matrix Service Company MTRX, Dril-Quip, Inc. DRQ and Pembina Pipeline Corp. PBA. While Matrix Service sports a Zacks Rank #1 (Strong Buy), Dril-Quip and Pembina hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Matrix Service’s 2019 earnings per share are expected to rise 58.4% year over year.

Dril-Quip’s 2019 earnings per share are expected to rise 136.5% year over year.

Pembina’s 2019 earnings per share are expected to rise 21.5% year over year.

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