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HONG KONG (Dow Jones)--China Petroleum & Chemical Corp.'s (SNP) refining operations remained profitable in the first quarter of this year, but high oil prices will squeeze margins below the fourth quarter's US$4 a barrel, Chief Financial Officer Wang Xinhua said Monday.
Though the Beijing-based company, known as Sinopec, reported a more than doubling in 2009 net profit thanks to lower costs for much of the year and a new fuel-pricing system in China, oil prices began to rebound in the second half, jumping nearly 30% in the fourth quarter and narrowing the company's refining margins.
Sinopec's refineries import more than 70% of their crude-oil needs, which had exposed the firm to heavy losses in past years when it wasn't able to recoup surging crude costs from consumers due to China's strict control over fuel prices. To lower the sensitivity of its earnings to its refining operations, Sinopec is looking to increase its crude-oil operation, announcing Sunday its first overseas acquisition of upstream assets.
"In 2010, along with the recovery of the world economy, demand in the international oil market will experience recovery and growth," Chairman Su Shulin told reporters Monday in Hong Kong. "We expect the overall oil price in 2010 will be higher than that of 2009."
Su said he expects Brent crude to trade between US$65 and US$95 a barrel this year.
Sinopec said Sunday its 2009 net profit jumped to CNY61.8 billion (US$9.09 billion) from CNY28.5 billion in 2008 because of lower fuel costs.
The strong result also came after China began linking fuel prices more closely to the international market. Under China's new resources pricing system introduced in 2009, refiners are guaranteed a 5% profit margin as long as the price of international crude is below US$80 a barrel.
However, China's domestic fuel guidance prices have been frozen since November because inflation is gathering pace. China's consumer price index rose 2.7% in February, picking up from 1.5% in January and the fastest gain since November 2008.
Su said that to broaden its earnings base, Sinopec is considering buying more overseas upstream assets including Addax Petroleum Corp. (AXC.T) from its state-owned parent, China Petrochemical Corp., but he didn't provide a timetable. In June, Sinopec's parent agreed to acquire oil explorer Addax Petroleum for $7.2 billion, which has a significant presence in Nigeria.
"Whether or not our parent will inject more assets into Sinopec will depend on individual projects, political risks, exploration risks and the benefit that can be brought to the company," Su said.
Sinopec said Sunday it agreed to acquire deep-water oil assets in Angola by buying a 55% stake in Sonangol Sinopec International Ltd. from its parent for US$2.46 billion, its first acquisition of overseas upstream assets.
Su said the Angola deal will increase Sinopec's 2009 pro-forma earnings per share 2% to CNY0.721 from CNY0.707.
Gordon Kwan, head of regional energy research at Mirae Asset Securities, said the deal "could just be the tip of the iceberg" as Sinopec strives to make its earnings less sensitive to the performance of its refining arm.
Daiwa Securities analyst Andrew Chan said the acquisition will be the start of more asset injections from Sinopec's parent.
"We see this acquisition as very positive for sentiment, and believe it may lead to a positive re-rating of the stock as it increases the company's upstream exposure," Chan said.
He expects the next potential asset injection by the parent to be the Nigerian upstream assets acquired through Addax Petroleum.
-By Yvonne Lee, Dow Jones Newswires; 852-2802-7002; yvonne.lee@dowjones.com
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