On Jul 18, 2014, Zacks Investment Research issued an updated report on China Petroleum & Chemical Corporation or Sinopec (SNP).
China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This presents attractive opportunities for industry players that can meet the country’s rapidly increasing energy needs. Being one of the two integrated oil companies in China, Sinopec is well-positioned to capitalize on this trend.
The company’s natural gas business has immense potential for growth over the coming years. The company lays emphasis on building production capacity, improving operational organization and growing natural gas output. During the first quarter, natural gas volumes rose 8.7% to 177.4 billion cubic feet.
In its refinery business, the company made attempts to boost its production of refined oil products at a high utilization rate. This was required to establish a steady supply to the market and fulfill its social responsibilities.
Sinopec also made major progress in western Sichuan, central Yuanba exploration and northeastern Sichuan. These activities are likely to assist the company in boosting shareholders’ value and increasing operating income in its exploration & production segment.
However, during the first quarter of 2014, the operating profit of the exploration & production segment decreased 18.4% on an annual basis in spite of the robust oil and gas exploration activities. The decline was mainly due to a decrease in crude oil prices and cost increase in upstream production.
It is also worth noting that Chinese oil companies are unable to charge close-to-market prices for their crude oil (though heavily taxed) as the government plays a major role in refined-product pricing (particularly gasoline and diesel) to control inflation.
Key Picks in the Sector
Sinopec has a Zacks Rank #2 (Buy). Currently, we prefer to remain at the periphery regarding the stock. However, better-ranked players in the energy sector like ConocoPhillips (COP), Statoil ASA (STO) and BPZ Resources Inc (BPZ), all sporting a Zacks Rank #1 (Strong Buy), are worth looking into.