中國石化 (SNP) 2006 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS]

Now I would like to transfer the call to the moderator, [Jane Lu of Christensen].

Thank you Erin, welcome and thank you for attending Sinopec's first quarter 2006 earnings conference call. Sinopec is hosting this conference call from Beijing and reporting the results for the company is CFO and the Senior Vice President, Zhang Jiaren, along with the head of each business unit. Before we begin this presentation I'd like to remind everyone of Sinopec's Safe Harbor policy.

Namely that certain statements made during the course of our discussion today may constitute forward looking statements that are based on the discussion of managements current expectations and beliefs, which are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond the company's control. Any forward-looking statements made are valid as of today and Sinopec takes no obligation to update these statements.

I'd now like to turn the conference call over to Mr Zhang Jiaren, CFO of Sinopec. Zhang Jiaren.

[translated] Ladies and gentlemen, welcome to our first quarter 2006 conference call. To start with, our personnel from the investor relations will go through the presentation for the first quarter and then my colleagues and I will be happy to take any questions. Thank you.

Ladies and gentlemen good morning, welcome to Sinopec results announcement conference call for the first quarter of 2006.

Market environment of quarter one. In the first quarter of 2006 Chinese economy maintained a rapid growth, domestic demand for petrochemical products has been further increasing. International crude prices climbed to new highs and the petrochemical products prices stayed at high levels. According to a reformed plan with petroleum pricing mechanism the government began to impose its special income levies on E&P companies, since March 26, 2006 and moderately raised the domestic price of refined products.

Sinopec actively optimized productions and operation to increase the operating volume; as a result, oil and gas production, refining throughput, sales of refining products, ethylene and the synthetic resin production were increased.

Operation results. Under IFRS, in the first quarter the company's turnover and other operating revenue totaled 227.195 billion RMB, up by 30.48% year-on-year. Due to the continuous increasing of crude price and time control of domestic price of refined products, EBIT was 14.862 billion RMB, down by 11.95% year-on-year. Profit attributable to equity shareholders of the company was 9.288 billion RMB, down by 3.62% year-on-year and earnings per share was 0.107 RMB.

Financial performance as of March 31, the company's long and short-term debt amounted to 117.269 billion RMB increased by 10.209 billion RMB compared with the year beginning, equity attributable to equity shareholders of the company was 232.844 billion RMB, increased by 9.288 billion RMB compared with the year beginning.

In the first quarter the company's net cash flow from operating activities was 1.612 billion RMB, a big decrease year-on-year, that was mainly due to the increase in inventory as a result of increasing crude prices. Net cash flow from investing activities was 14.943 billion RMB, net cash flow from financing activities was 11.84 billion RMB.

E&P segment. The company discovered Puguang gas field in north east Sichuan, which is China's biggest and most abundant monoblock marine facies gas field. Meanwhile the company also achieved significant progress in exploration and development in Tahe oilfield and Ordos Basin. The construction of oil and gas capacity has been ongoing smoothly.

In the first quarter the production of crude totaled 69.57 million barrels, natural gas 24.02 billion cubic feet, up by 2.81% and 23.42% respectively year-on-year. The company's averaged realized crude price was US$54.53 per barrel, up by 50.68% year-on-year. Lifting cost was US$7.47 per barrel. EBIT of E&P settlement in the first quarter was 16.623 million RMB, up by 159.98% year-on-year.

Refining segment. In the first quarter the company actively optimized resource allocation and transportation fully leveraged production capacities and maintained safe, stable and full load operation of refining facilities. In addition the company optimized facilities operation so as to meet the market demand. The refining throughput reached 35.17 million tonnes in the first quarter, up by 2.45% year-on-year. Both light yield and the refining yield achieved this increase year-on-year.

Refining segment performance. Under tight control on domestic refined products prices, although the company has moderately adjusted its internal prices to ensure the normal operation of the refineries in the first quarter. The company's refining segment still suffered a loss of 7.875 billion RMB with a refining margin of minus US$1.03 per barrel.

Marketing segment. In the first quarter the company acquired products from various channels to guarantee market supply, optimizing distribution of refined products lowered the cost of transportation and improved services. In the first quarter the total sales volume of refined products amounted to 26.03 million tonnes, up by 7.87% year-on-year, among which the retail volume increased by 23.85% year-on-year. In the first quarter the company has 27,454 company owned and operated petrol stations, up by 2.93% year-on-year. The average throughput for petrol stations reached 2,428 tonnes, up by 20.32% year-on-year.

Marketing segment performance. Influenced by the domestic price control over refined products, EBIT for marketing segment in the first quarter was 3.329 billion RMB, a small decrease year-on-year.

Chemicals segment. In the first quarter the stable operation of the major chemical facilities ensured the large increase in major products production. In addition the company actively optimized products mix and increased the production of high value-added products. The production of ethylene and synthetic resins grew by 34.94% and 23.29% respectively year-on-year.

Chemical segment performance. In the first quarter the price of chemicals feedstock increased significantly. The company strived to enhance the efficiencies and it gave full play to chemical sales company, so as to deal with the pressure from the increasing price of chemical feedstock. The company's EBIT for chemical settlement in the first quarter was 3.135 billion RMB.

CapEx. In the first quarter of 2006 the company's CapEx totaled 14.39 billion RMB, 5.372 billion RMB was used in the E&P segment for newly added crude production capacity of 1.27 million tonnes per year and a gas production capacity of 469 million cubic meters per year.

2.821 billion RMB was used in refining segment for the expansion and the revamping of Guangzhou and Yanshan refining units, and some other secondary processing units which went on smoothly.

4.136 billion RMB was used in marketing segment, mainly for establishing logistics system, construction and purchasing petrol stations. 97 new petrol stations were added during the reporting period.

1.725 billion RMB was used in chemicals segment for the revamping of Maoming ethylene and Shanghai ethylene glycol, Yangzi aromatics and PTA and in coal gasification projects of three chemical fertilizers plants, which went on smoothly.

That is the company's operational results in the first quarter of 2006. Now all questions are welcomed. Thank you.

[translated] And following this we are ready to take any of your questions.

[OPERATOR INSTRUCTIONS]. Our first question is from Mr [Gupta].

Good morning. This is [Prashan Gupli] from Credit Suisse. Just two quick questions, first on your working capital, thank you for clarifying upfront but just wanted to check if you can give us the amount of increase in inventory in the first quarter, and if you can tell us the volume increase in crude oil inventory and product inventory that you had in the first quarter? That's my first question and I'll ask my second question after this.

[translated] For the first quarter the company has increased in its inventories, for the crude inventory it was increased by about 600 to 700,000 tonnes, for the refined products inventory it was increased by 100,000 tonnes plus.

And what's the amount of increase in working capital as a result of these changes?

[translated] The working capital change was about 8 billion RMB.

Thank you very much. So my second question is on Puguang. I remember at the time of your analyst meet after the full year results, you had mentioned that the development of Puguang would, you know you would spend about 38 billion RMB including the pipeline, could you tell us that, you know, if your current CapEx targets for 2006 include spending towards Puguang?

[translated] The total expenditure on the Puguang project will be 37.6 billion RMB, the E&P in that region will account for 24 billion and the pipeline will cost 14 billion. The CapEx for Puguang project this year will be about 4 billion RMB.

This 4 billion is already included in the CapEx plan for this year which is 70 billion, and you can also notice that for the E&P CapEx it was increased by more than 6 billion, that was partly because of the expenditure over the Puguang project.

Thank you sir, thank you very much.

Our next question is from Lawrence Lau from BOCI. Please go ahead.

[translated] This question from Bank of China International, the question concerns the refining segment, what's the volume for the sulfur content, high sulfur content crude for the first quarter and what's the average crude cost? And what do you see as the change to compare with the first quarter in the second quarter?

[translated] High sulfur content crude processing volume in the first quarter was 8.8 million tonnes, an increase of 4.15% year-on-year. The average crude cost for the first quarter is $59.74 per barrel. And as for what will be the earnings situation for the first half, as you can see we are running severe loss for the first quarter and if the price readjustment can't be fully linked with the international price, that is to say the crude price still maintained at $70 will still run the loss for the second quarter and even the first half.

Our next question is from Kelvin Koh of Goldman Sachs. Please go ahead.

Hi, two questions from me. Firstly based on the current crude oil price and current domestic product prices, can you estimate roughly what your refining margins are currently and what you estimate of the refining margins will be in the second quarter?

Second question is on the E&P division, I noticed that the lifting cost did increase 15% year-over-year but I also remember that in the fourth quarter you said your lifting cost had risen to more than $10 per barrel and so for the first quarter of '06 the drop seems quite meaningful. Is there any particular reason for the drop or is there any seasonality or special expenses or charges that were included in the fourth quarter that were maybe extraordinarily high?

[translated] The refining margin for the first quarter is minus $1.03, for the second quarter we see this loss will be increasing. As for the lifting cost it should as a lifting cost in the first quarter, has been decreased to compare with the fourth quarter last year but this was not because of some major measurements taken by the company, this is because for the first quarter the working conditions are especially harsh in the oil fields, that's why the company did not develop the [hard to] develop oil wells or we didn't make much actions on the installation of the long [forbidden] wells. But given the current high crude price the company will strengthen measures in developing the [hard to] develop wells, so we see the overall level of lifting cost for the whole year will not be less than last year's level or even higher.

Our next question is from David Hurd from Deutsche Bank. Please go ahead.

Good morning and congratulations on your first quarter numbers. My question has to do with your production numbers, they were quite high. Your first quarter oil was about 2.3/2.7 something like that, 2.8% up and your first quarter of gas output was 23% up. In February of this year you gave guidance on both those numbers for full year 2006, your guidance on oil was 1.7% and your guidance on gas was 11%, I was wondering if your guidance was still valid or whether or not you needed to lift your guidance numbers for production, both on oil and gas? Thank you.

[translated] Currently we don't plan to lift our estimates over the whole year increase because the short term -- within a short period of time the increase won't show the overall situation for the whole year.

So for 2006 you're still looking for a 11% gas production output increase?

[translated] More or less the same.

Alright, and same thing with oil obviously, thank you.

Our next question is from [Stuart Smith] from Merrill Lynch, please go ahead.

Good morning. In your presentation you refer to further improvements to the petroleum pricing mechanism, would you be able to share your thoughts with us on what you think that new mechanism might be? And secondly, I also noticed there was a very pleasing rise in gas prices, up about 17% to $2.62, can we expect a similar increase on the year-on-year basis?

Can you repeat the second question?

The second question related to realized gas pricing which was up 17% for the quarter, do we expect similar for the year?

[translated] As for the pricing mechanism from March 26 the new policy has been announced and all relevant policies and regulations are also rolling out. For example on March 26 the levy on the special oil income has been imposed and the subsidy made for the farmers as well as the disadvantaged groups, the value is 12.5 billion RMB is also being allocated. There is also the increase in the jet fuel tax and also the train freight fee was also increased by 0.044 RMB per tonne and all relevant cities are also having the hearing on the taxi fare readjustment. So you can see all relevant regulations are being implemented. With this we expect the pricing mechanism for the refined products will be also quickened otherwise our refining segments will experience further loss.

As for the realized natural gas price, whether it could be reached by 17%, we are also optimistic about this target. According to the readjusting in price last year the profit was increased for year 2005 by 500 million, and for the first quarter this year we also see this has been demonstrated, so we are optimistic.

Thank you very much.

Thank you.

Our next question is from Mr Gupta from Credit Suisse, please go ahead.

You got my name wrong second time, that’s fine. But just a question on equity rating. PetroChina did a placement some time late last year and CNOOC did a replacement recently. It would appear that given your CapEx plans for Puguang, given that your [inaudible] are high and given that refining profitability is still weak, you probably need cash more than the other two companies, are there any plans for you to do a placement? And my second question would be, even if you don’t have plans do you have an enabling resolution from the Board allowing you to do a top up placement if you do wish to do so today?

[translated] So far there's no plans for the financing for the company, and as for if the short term financing bond is needed actually this has been approved by the Board of Directors and the management committee have been authorized to issue such but so far we don’t have plans for the financing.

Just to clarify you have -- the Board has authorized you to issue shares if you want but there's no plan, is that right?

[translated] The Board of Directors just approved the issue for short term bonds not the -- just the commercial paper, not the reissue of their shares and actually this -- the commercial paper shall not exceed 10% of the company's net asset. And last year we have issued six month commercial paper because interest is slow, we think this is feasible.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question is from Tom [Hilbot] at Citigroup, please go ahead.

Gentlemen, good morning and congratulations, just a quick question for you. Your other Chinese peers, PetroChina and CNOOC have been very active in their international E&P activities. and we know that Sinopec Group at the parent company level has also been involved in acquiring exploration and production assets internationally. I wondered if you could clarify for us the role that you expect Sinopec Corp to play in the international E&P activities of the overall Group?

At the time of IPO we've clarified it, because of the risks involved, the economic risks as well as the political risks, the overseas assets acquisitions will be undertaken by the parent company, that is Sinopec Group, and over the past five years Sinopec Group has made significant progress. We expect the equity crude from the international assets for this year will be 3.5 million tonnes, and by year 2010 the equity crude will be increased to 10 million tonnes, so you can see there's -- full results has been achieved.

As for the Sinopec Corp we haven't made our steps in the international acquisition of E&P assets, however as soon as the assets acquired by the parent company is generating stable return and risk is minimized the listed company or Sinopec Corp has the priority to buy the assets from the parent company.

Thank you.

Our next question is from Gordon Kwan from CLSA. Please go ahead.

Good morning. You mentioned earlier that your international -- your parent's international equity crude will almost triple from now to 2010 to 10 million tonnes per year, can you tell me where those equity crude production is from, which countries?

And secondly, can you tell us the progress of your Shandong L&G project and whether the Canadian oil sands, the [inaudible] that you purchased earlier, now makes more sense and will you be doing more acquisitions? Thank you.

[translated] This 10 million times figure is based on the current acquired projects or the projects in exploration, the reasons will be mainly from the West Africa and North Africa. As for the Shandong L&G project, we are in the process of submitting the details, engineering and construction jobs and we are also undergoing smoothly. We can also say that the gas source for this Shandong L&G projects is already in place.

And for the Canadian oil sands project, our next step will be for the exploration as well as work related with the operating and we're now in the preliminary stage. Thank you.

Our next question is from Rachel Tsang from Daiwa. Please go ahead.

[translated] The question from Daiwa. The PetroChina, CNOOC, realized crude price is linked with the regional benchmark crude and the question is can the company elaborate on what type of crude is the company's realized crude price linked with.

And the answer is, our crude is mainly linked with a [inaudible] crude, but that's for the crude from the existing eastern oil fields like Shengli, in that area the production is stable or even is decreasing. The major source for our crude now also comes from the western part that is Tahe oilfield, and that crude is linked with [Dury] crude.

The crude from Tahe oilfields now accounts for 12 to 13% of the company's total crude production.

[OPERATOR INSTRUCTIONS]

Our next question is from Tony [Tsang] from CICC. Please go ahead.

[translated] Question from CICC. The question is could you elaborate more about the progress in the Tahe [inaudible] fields, further there is a positive discovery as a result of the deep wells?

[translated] Actually the company really achieved significant progress in the Tahe field. P3 results now reached 1 billion tonnes and the annual actual production increase is about 8 to 10%.

Production target for this year is 4.66 million tonnes and we expect to reach the production of 8 to 10 million tonnes by year 2010. You're mentioning we're calling it the [inaudible] number one well, we also explained that during the annual results -- results announcement, currently we are making smooth progress but for deep well like that it takes some time to make appropriate appraisal of the discovery there, and once the discovery is affirmed we will also make relevant announcement.

Our next question is from Gordon Kwan - CLSA. Please go ahead.

Thank you. A couple of follow up questions. You mentioned earlier that the Shandong L&G gas source is placed, can you tell me where the gas source will come from?

And second question is, you mentioned the P3 reserves and the Tahe oilfield is over 1 billion tonnes, this seems very high. In the next few years would you expect these P3 reserves to become P1 reserves? Thank you very much.

[translated] The source for the Shandong L&G project will come from majorly four regions, the first one which is also currently the major supply is from the [inaudible] oilfield, the second one will be from the [inaudible] reserves in the Ordos Basin, currently supplying Beijing city and part of the gas will also go to Shandong Province. The third source is -- we signed a long term supply contract at Penglai area and the fourth one is the Puguang gas field we mentioned before. The gas is intended for [inaudible] and Shandong so you can see there is sufficient gas supply.

As for the question turning the P3 results into P1 results, actually our hope match, we are now doing these further explorations to make the concrete the approved reserve, currently is 600 million tonnes and actually you can see we're not very far from the target. The Tashen, number one well is doing the exploration for further increase in reserves. As you know this area is the marine facies and for the wells has gone to a deeper layer of -- the layer of the rocks, we're now entering even the stages earlier than the cretaceous stage; the formation as well as the preservation conditions there is very good. However, because this kind of layer formation, this is a new target or new topic for us, wish to make further increase in the reserve in the coming few years. Okay.

Thank you, there are no further questions, we will now begin closing comments. Please go ahead Jane.

[OPERATOR INSTRUCTIONS]

Good day everyone.

This concludes our conference call, thank you all for attending.