FocusSinopec, PetroChina seen to record refining profits in 2009

13 March 2009 07:32  [Source: ICIS news]

By Judith Wang

SHANGHAI (ICIS news)--The refining businesses of China state-owned petrochemical giants PetroChina and Sinopec should return to profitability this year, helped by low crude values and the expected boost in consumption from the government’s hefty fiscal stimulus, analysts said on Friday.

The sharp decline in crude prices should help bring down the cost of producing derivative petrochemicals, analysts said. Crude oil prices have retreated by more than 70% from their peak in July last year, hovering at above $40s/bbl (€31/bbl) in recent weeks.

"There is no doubt that their profit in 2009 should be better than last year as crude oil prices were likely to stabilize at low levels," said Xiong Jie, an analyst from Nanjing-based Huatai Securities.

"In my opinion, the international crude values will stand around $40-50/bbl, which is good news for the two giants," said Xiong.

Asia’s largest refiner Sinopec had warned that its 2008 earnings plunged by more than 50%, while PetroChina guided for a 20-30% pullback in profits over the same period given sharp declines in demand that was accompanied by tumbling chemical prices in the second half of the year.

These state-owned companies, which will release their 2008 financial results late this month, will still manage to show earnings while other Asian petrochemical majors were deep in the red given the huge subsidies they usually get from the government to cover refining losses, analysts said.

Based on the latest data available, Sinopec’s refining losses were at yuan (CNY)46bn while PetroChina had incurred CNY59bn in losses in the first half to June. Their third quarter results provided no breakdown on the refining losses.

This year, the prospects of Sinopec are much better with the possibility that it could at least double its earnings given a low base in 2008, said Wang Xixin, an analyst at Wuxi-based brokerage Guolian Securities.

Sinopec has more downstream businesses than PetroChina that should help drive up its earnings despite the government’s curbs on fuel prices,  but everything will still depend on how demand will fare for the rest of the year, analysts said.

"Under the current oil prices, I assumed Sinopec’s profit will increase by over 100% this year. The company’s EPS (earnings per share) last year is expected to be yuan (CNY)0.25-0.30 (3.6-4.4 US cents), while in 2009 it will increase to CNY0.58-0.62," Wang said, in Mandarin.

PetroChina may just register flat earnings with EPS of CNY0.5 as it derives the bulk of its earnings from oil and gas exploration, which makes it more vulnerable to the price curbs of the government.

China had reduced prices of gasoline and diesel by CNY140/tonne and CNY160/tonne, respectively, in mid-January due to fluctuating global crude oil values.

There are concerns that the government would further cut fuel prices this year to boost consumption and prevent China’s economy from slowing further, analysts said.

Fiscal spending will be stepped up in China to allow its economy to grow at 8.0% in 2009. But some analysts believe this to be an ambitious growth target amid the rapid deterioration in the global economic backdrop.

China had introduced a yuan (Y)4,000bn fiscal stimulus package in November last year in a bid to rev up economic activities over the next two years.

A separate package has been approved for the energy sector in February 2009 that should ensure that major petrochemical projects get proper funding and help the ailing industry.

China's petrochemical industry failed to make profits for the first time in a decade in December 2008, with the total turnover falling 6.8% year-on-year, according to the data from the China Petroleum and Chemical Industry Association.

"The petrochemical output will increase this year, but it is very difficult to say whether the petrochemical industry could return to profitability if product prices were still low," said Li Guangzan, an analyst from Hongzhou-based Founder Securities.

($1 = €0.77) ($1 = CNY6.84)

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By: Judith Wang
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