Chinese Equities
Sinopec Basks Downstream, As PetroChina Gets Winded
Tina Wang, 04.29.09, 02:10 AM EDT

Beijing's new price control regime and China's likely bottoming out set stage for refiner's earnings recovery

HONG KONG -- Sinopec looks better poised to capitalize on China's economic recovery than PetroChina.

China's top oil refiner, China Petroleum & Chemical Corp., commonly known as Sinopec, said Tuesday its first-quarter profit soared 85% from a year earlier, on cheaper crude and Beijing's adoption of a more market-oriented fuel pricing system. Sinopec hauled in 11.2 billion yuan ($1.6 billion) for the first quarter.

Since January, the Chinese government, which controls dometic fuel prices, has aimed to adjust fuel prices in the event of a sharp drop or gain in global crude costs that lasts for at least 10 days. That has given refiners, which were squeezed when global crude soared over $120 a barrel last summer, more predictability and protection of their profit margins.

Sinopec's revenue tumbled 31% from a year earlier, on a 3% dip in refining output and a steep 12% drop in fuel sales amid China's slowdown. But operating costs, due to cheap global crude that has hovered near $50 a barrel, fell a further 44% from a year earlier, widening the company's profit margin. The refining division scored its most profitable quarter ever, Citi analysts noted.

As of the end of March, domestic fuel demand has picked up to levels before China's slowdown, according to Sinopec. That means the company is poised for a banner second quarter and a strong fiscal year, as Chinese growth starts down the path of recovery.

Downstream activities like refining, sales and petrochemicals comprise most of Sinopec's revenue, while upstream businesses, like oil and gas exploration and extraction, make up over half of PetroChina's revenue, according to Revere Data. Oil's depressed price will continue to hurt PetroChina, China's top oil and gas producer, which let costs spiral upward during the oil boom and is now trying to draw down stockpiles.

A day earlier, PetroChina posted a 35% drop in first-quarter profit, to 18.9 billion yuan ($2.8 billion), compared with last year's corresponding period. But oil production slumped a wider than expected 5.7%, in the company's steepest decline since its public listing in 2000. PetroChina aims to cut oil output by 4.4% this year to control costs.

"The company’s inability to control cost growth during the upturn of recent years has left it poorly positioned for a downturn and it faces very weak earnings," Citi analysts said.

In Hong Kong trading Wednesday, Sinopec climbed 2.9%, or 16 Hong Kong cents (2 cents), to 5.76 Hong Kong dollars (74 cents). PetroChina added 6 Hong Kong cents (1 cent), or 0.9%, to 6.58 Hong Kong dollars (85 cents).