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Sinopec (SNP) 2018 Profit Surges Y/Y, Unipec Incurs Huge Loss

Zacks Equity Research

China Petroleum & Chemical Corporation SNP or Sinopec announced 2018 basic earnings per share of RMB 0.515 million, 22% higher than the 2017 figure of RMB 0.422 million, on the back of higher natural gas production and refinery throughput volumes.

Its 2018 operating income increased 22.1% year over year to RMB 2,881,582 million and operating profit jumped around 16.5% to RMB 101,290 million. Moreover, adjusted net profit attributable to equity shareholders of the company in 2018 rose 27.3% to RMB 58,031 million from RMB 45,582 million in 2017.

However, Sinopec’s fourth-quarter net income suffered a huge loss due to Unipec’s misjudgement. Net income of Sinopec in the October-December quarter is estimated to fall 86% year over year to RMB 2.4 billion, per Reuters. This marks the company’s worst performance since third-quarter 2015.

China Petroleum & Chemical Corporation Price, Consensus and EPS Surprise

China Petroleum & Chemical Corporation Price, Consensus and EPS Surprise | China Petroleum & Chemical Corporation Quote

Operational Performance

Exploration and Production: In 2018, Sinopec’s crude oil production decreased almost 1.8% year over year to 288.5 million barrels. Although oil production in the domestic market marginally increased 0.2% year over year to 248.9 million barrels, overseas volumes slipped 11.6% to 39.6 million barrels.    

Natural gas volumes increased almost 7.1% year over year to 977.1 billion cubic feet in 2018. Also, total oil and gas production rose 0.6% year over year to 451.4 million barrels of oil equivalent.    

Sinopec stated that 2018 operating loss from the segment significantly narrowed from 2017 levels. 

Refining: The company’s Refining business recorded refinery throughput of 244 million tons (up 2.3% year over year). It also produced approximately 154.8 million tons of petroleum products, which represents a 2.7% rise from the 2017 level.

Reportedly, Sinopec managed to save RMB 6.4 billion in 2018 in crude import expenses for its refineries, which stemmed from lower crude prices. The state-run company processed around 246 million metric tons of oil last year, of which 85% was imported. Total crude import cost in 2018 was more than RMB 600 billion.

Marketing and Distribution: The Marketing and Distribution segment sold 180.2 million tons of refined oil products in the domestic market, reflecting a 1.4% year-over-year increase.

Chemical: In 2018, production of ethylene decreased almost 0.8% year over year to 11,512 thousand tons from 11,610 thousand tons. Also, production of Synthetic resin was 15,923 thousand tons compared with 15,938 thousand tons in the year-ago period. Gross margin from this segment in 2018 was in line with 2017 levels.

Assets

At the end of 2018, Sinopec had total assets of RMB 1,593.5 billion, marginally down from 2017 levels. As of Dec 31, 2018, total equity attributable to equity shareholders of Sinopec was RMB 717.3 billion, down 1.4% on a year-over-year basis.

Sinopec Trading Arm Loses Millions

Sinopec stated that its trading arm, Unipec has incurred a massive loss due to the application of "inappropriate" techniques for hedging crude oil prices, when it was relatively cheaper. Owing to the misjudgement, the company registered an operating loss of RMB 4.65 billion (around $687.4 million) in 2018.

The statement came a month after Sinopec, one of the biggest refiners in Asia, suspended two of its top executives. Chen Gang, the deputy general manager of Unipec, assumed the responsibility of administrative works following the suspensions. Sinopec put an end to flawed transactions and adopted measures to avert further losses. The company reassured that its production and operations were not affected by the huge loss.

The misjudgement at Unipec was uncovered when crude prices plunged in the fourth quarter. Sinopec suffered the losses on the futures side of the hedging as the crude oil prices tumbled. Through fourth-quarter 2018, the average monthly West Texas Intermediate (WTI) crude prices declined from $70.75 per barrel in October to $49.52 in December, per the U.S Energy Information Administration. Further, the global benchmark Brent crude dropped from around $87 per barrel in October to below $50 level after Christmas.

Zacks Rank and Stocks to Consider

Currently, Sinopec has a Zacks Rank #5 (Strong Sell). Investors interested in the energy sector can opt for some better-ranked stocks as given below.

YPF Sociedad Anonima YPF is a Buenos Aires, Argentina-based integrated energy company. Its bottom line for 2018 is expected to increase more than 27% year over year. The company currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Calgary, Canada-based Gran Tierra Energy Inc. GTE is an oil and gas exploration and production company. Its bottom line for 2018 is expected to increase more than 300% year over year. It delivered average positive earnings surprise of more than 24% in the trailing four quarters. The stock currently has a Zacks Rank #2. 

El Dorado, AR-based Murphy USA Inc. MUSA is a refining and marketing company. Its bottom line for the quarter ending Mar 30, 2019 is expected to increase more than 190% year over year. The stock currently has a Zacks Rank #2. 

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