中國石化 (SNP) 2006 Q3 法說會逐字稿

Hello, ladies and gentlemen. This is Sinopec's conference call. I'll be facilitating the conference call today. I would like to welcome everyone to the conference call of Sinopec's third quarter 2006 earnings conference call. Please be aware that each of your lines are in listen-only mode. At the end of the presentation there will be time for a question and answer session. Instructions about the procedures for raising questions will be given at that time of the session.

For your information, a replay of the call will be available immediately after the end of this teleconference until 9.30am November 1, 2006 Beijing time. To access the replay, please call 852-3012-8000. The access code will be 428557. You can also listen to the replay on the Company's website at www.sinopec.com.

Now I'd like to introduce Miss Jane Liu, the moderator of the conference call. Miss Liu, you may start.

Thank you, operator. Ladies and gentlemen, thank you for attending Sinopec's third quarter 2006 earnings conference call. Management hosting this call from Beijing include Mr. Dai Houliang, Executive Director and Chief Financial Officer of Sinopec, and the head from each business unit. Today our call will be conducted in two sections. First Mr. [Wan Zheng] of Investor Relations Department will give a brief introduction of 2006 third quarter results, followed by the Q&A session.

Now I'd like to turn the call over to Mr. Wan, who will start the review. Mr. Wan, you may begin.

[Interpreted]. Good morning, ladies and gentlemen. Welcome to the teleconference on Sinopec's third quarter 2006 results announcement.

During the first three quarters of 2006, China's economy maintained rapid growth with GDP up by 10.7%. The market demand for refined oil products and chemical products maintained [rational] growth. International crude oil price experienced a record high then decreased dramatically. Price control on refined oil products remains in effect. Chemicals prices keep high. Based on the market conditions, the Company continues to optimize cooperation and achieve [such] results. Oil and gas production, crude throughput, refined oil products sales and production of chemicals such as ethylene [inaudible] [was maintained].

According to the International Accounting Standards, during the first three quarters our revenue totaled CNY773.91b, up 30.6% year-on-year. EBIT amounted to CNY54.168b, up 10 -- up 14.82% year-on-year. Profit attributable to shareholders reached CNY34.417b, up by 21.83% year-on-year. EPS was CNY0.397.

As of September 30, 2006, our short-term/long-term debt totaled CNY131.595b, up by CNY24.125b announced at the beginning of the year. Equity attributable to shareholders was CNY246.702b, up by 10.35% than year beginning.

During the first three quarters 2006, cash flow from operating activities was CNY44.22b. Cash flow used in investing activities was CNY69.779b. Cash and cash equivalents ending balance was CNY10.308b, down by CNY3.437b than the year beginning.

During the first three quarters we have fully implemented our resource strategy, giving throughway to oil and gas and achieved total growth in oil and gas production.

Crude production was 30.02m tons, up by 2.84% year-on-year. Natural gas was 5.348b cubic meters, up by 18.08% year-on-year. For the first three quarters, crude realized price averaged CNY3,388.03 per ton, up by 34.13% year-on-year. Gas realized price averaged CNY750.70 per thousand cubic meters, up by 14.1% year-on-year. Lifting costs was CNY470.35 per ton, up by 9.68% year-on-year. EBIT was CNY50.929b, up by 59.97% year-on-year.

In the Refining business, we closely followed the situation in international oil market, diversified to other crude resources, which secured [inaudible] costs readjusted for that mix and ensured supply to the market. Crude throughput and refined oil products' output were up by 4.45% and 2.93% respectively. Light yield and refining yield have both increased.

Impacted by the pricing trend, Refining margins for the first three quarters was minus CNY131 per ton and a loss of CNY29.193b was recorded in EBIT of Refining segment.

In Marketing we managed to increase sales more steadily and further optimized Marketing structure. Assets were made by leveraging of our modern logistics system to reorganize the transportation of refined oil products. For the first three quarters total sales volume and retail volume hit 83.06m tons and 54.27m tons, respectively up by 7.17% and 17.52%. By end September, total number of gas stations reached 28,546, 27,746 of which are self-operated.

We have further enhanced the efficiency of gas stations, annualized throughput per self-operated station by 2,608 tons for the first three quarters, up by 14.54%.

Guidance for the pricing of refined oil products was disclosed this March by the central government and price for refined oil products lifted twice since then. EBIT of Marketing segment for the first three quarters was CNY20.576b.

In Chemicals, we stayed stable and [inaudible] operations in our mechanical facilities. We have increased our production, optimized product mix and further concentrated sales. For the first three quarters, production volume of ethylene and synthetic resins reached 4.5337m tons and 6.2887m tons respectively, up by 17.8% and 13.38%. EBIT of Chemicals segment was CNY12.06b, down by 17.66% year-on-year.

CapEx in the first three quarters totaled CNY44.639b, in which E&P was CNY18.081b, Refining was CNY7.098b, Chemicals was CNY9.328b, Marketing and Distribution was CNY8.51b, Corporate and Others CapEx CNY1.622b. CapEx in 2006 has been changed from CNY70b to CNY80.391b, up by CNY10.391b, in which E&P, Refining and Chemicals increased by CNY1.59b, CNY6.259b and CNY3.013b respectively, whereas Corporate and Others was down by CNY472m.

That's all for the operations on the first three quarters' results. Now my colleagues and I would be happy to take your questions. Thank you very much.

[OPERATOR INSTRUCTIONS]. Ladies and gentlemen, our first question comes from [Bokhal Persong].

Morning, sir. This is Prashant Gokhale from Credit Suisse. I have two questions, first one on Refining. Could you tell us how the trend in Refining profits was in the third quarter? I noticed that you made a CNY12m loss. Can you tell us on a monthly basis, just an idea, not exact numbers but just an idea of how the profit would have come? Is, for example, September much better than July and August? And what can we expect for October, for example? How does October on average compare to the third quarter or even the second quarter? That's the first question and I'll ask second question after this one.

[Interpreted]. Our quarter three's Refining margin totaled minus US$3.51 per barrel. According to our expectation, the Refining margin in October will be about US$0.62 per barrel. But the profit margin will be also impacted by these inventory controls and also the change in the cash operating costs.

Thank you, sir. So, my second question is actually with working capital. In the first half, if I remember correctly, working capital had gone up and the cash flow was negative as a result of the working capital. Can you tell us incrementally what happened in the third quarter? Did working capital go up further or did it come down?

In the third quarter or first half?

No, first half working capital went up. I'm just saying what happened in the third quarter after that.

[Interpreted]. In the first quarter, because of the impact on the inventory build-up, the cash outflow to build up inventory has been going up. And in the second quarter the cash operating -- working capital has been turned around. In the third quarter, we have identified the third quarter is better than Q1 and Q2. And under the current oil price, our profit margin will be increased in the fourth quarter, so the working capital will also get a turnaround. Thank you.

[OPERATOR INSTRUCTIONS]. We have a question from [Dennis Wong] from LBMC.

[Interpreted]. I have two questions. The first question is on the Refining segment. We have identified you have got more loss in Refining segment. So what do you think of this situation? And also, under the current oil price, what do you think of the oil price trajectory in the future?

Second question is on the drivers for the profit margin growth and what's your point of view for the Q4 performance?

[Interpreted]. In response to your first question, indeed, according to our announcement just now, for the first three quarters we indeed reported a loss in Refining segment. There are two reasons. First of all, it's because of oil price highs and also the tight control of the oil product price [mechanism].

Second reason, we used to have certain transferring profit from Marketing to Refining segment by adjusting the prices in between. But now, according to the regulations of the government, we have implementing strictly according to the [inaudible] [FC to] plant price for the Refining segment. That's why certain loses have been demonstrated on our financial books in the Refining segment.

According to the current international oil prices, we believe when the oil prices go down in the future, our Refining profitability will be improved in the future. This could also be demonstrated in our expectations for October's profit margin for the Refining segment.

In terms of the driving forces for Refining segment, we believe we could strive to further enhance our capability of the integrated advantage in E&P, Marketing and Distribution and Refining and Chemical segments. We expect to have higher returns in Marketing and Distribution and our Chemical segment the profitability should also be recognized. We believe when the oil prices for the oil product is linked with the international market, our Refining margins will go into a better direction and our future growth will be positive.

Thank you.

[Interpreted]. Thank you.

[Interpreted]. And I would ask one more question. As you expect that the future Refining margin will be improved, could you elaborate how much degree will be improved in terms of Refining margin?

[Interpreted]. The profitability in Q4, the breakdown of different segments as follows. Our Chemical segment profitability will be kept in par with the first three quarters. Marketing and Distribution will somewhat similar with that of the first three quarters. And because of the oil price decrease, our E&P segment's profitability will be somewhat decreased in the fourth quarter. Currently we are not able to disclose the Q4 specific number for the profit margin until the Q4 result announcement. Thank you.

Okay. We'll go with our next question, [Tsang Zhentou] from CICC.

[Interpreted]. We have two questions from CICC. The first question is on the EBIT of the Marketing and Distribution segment. We identified the EBIT of the Marketing and Distribution segment is better than the first two quarters. And do you think you have given certain -- do you still give certain subsidies on the price of the Refining -- refined products?

The second question, we have noticed that there are about 20m tons oil products not from our self-produced refined products. What's the source of this part of refined products? Where do you purchase them?

[Interpreted]. To respond to your two questions, indeed, since our price adjustment in May 24, we have been implementing strictly according to the ex-plant price for the Refining segment that we demonstrated a better EBIT in the Marketing and Distribution segment.

And indeed, in response to your second question, the sales volume of oil products is larger than what we produced. This is because we have fully captured our advantages in our regional and marketing network. We purchased the refined products from the local refineries, from such some refineries in the society and also from [CMGT]. This part of the purchase represents about 20m tons.

[Interpreted]. I have one more question. We noticed that CapEx in Marketing and Distribution segment totaled CNY8.5b. So where did you spend and what's the use for it?

And another question is what you think of the cost for build new retail stations or acquire a new station?

[Interpreted]. The CapEx we used in the Marketing and Distribution segment is for the pipeline construction, so as to further expand our Marketing network. In this sense, we aim to further cement our market position and our dominance in the Marketing segment.

Secondly, when we invest in new stations or acquire a retail station, it much depend on the scale of the station of our target, and also depending on the location of the station. The region varies and the investment also varies. So we are not able to give you a definite or fixed figure for the cost of the retail station but it is mainly subject to our plan and the location, target location of the retail stations. Thank you.

We will go with our next question from Prashant Gokhale from Credit Suisse.

Hello. Is that my question? Can you hear me?

Yes.

Hi. So just going back to Refining, if you could just help us with a few quick data points. Could you tell us what the average cost of crude was for the third quarter and what was it for October? That's one.

And second, could you just clarify if you use the weighted average method for inventory calculation or is it first in/first out?

What's your second question?

The second question is for inventory costs, inventory calculation, do you use first in/first out or do you use weighted average method?

[Translated]. In response to your second question, we have been using the weighted average method for the inventory costs. From the future quarter one to quarter three, our average crude costs coming to our plant total -- represent US$64.2 per barrel. Our crude purchase cost in Q3 is nearly US$70.5 per barrel. This is a CIF price. Thank you.

Then would you be able to tell us what it was broadly for October? Is it significantly lower than the third quarter?

[Translated]. Because of the international oil price decrease, we expect the October should be much lower in terms of the crude purchase cost. And we also imported about 70% from the overseas market.

Thank you, sir.

Thank you.

Okay. We will go with the next question from [Chang] from Credit Suisse.

Hi. I think my question has been asked by the previous speaker. It's okay. Thanks.

Thank you, sir. Our next question comes from Rachel Tsang from Daiwa.

[Translated]. I have three questions. First of all, we noted that the oil price is decreasing. If the oil price were to be decreased to $50 per barrel, will your high level and premium products will break even in such situation? And we noticed that your crude inventory will last for over 20 days. So will your November profits will be breakeven in November?

Second question, I noticed that you have reported a loss in the R&M profitability. Would you think your quarter four Refining and Marketing [facilities] will this profitability will be improved?

Third question - what do you use for your average exchange rate for the Q2, 3 -- quarter three? And, for example, when I calculate your lifting cost for E&P, it has been increased in quarter three. So what do you usually use for the exchange rate in quarter three?

[Translated]. Our inventory for the crude will last for about 20 days and the Q4 profitability still under our expectation, I'm sorry. Since there will be many uncertainties for Q4, we are not able to give you an exact figure for Q4. And the exchange rate we used for the first three quarters is averaging 8.0 [technical difficulty].

I apologize for the delay. This is Bill from Genesis. The next question comes from Scott Weaver of Macquarie. Please go ahead, Mr. Weaver.

Good morning, guys. Yes, I'd just like to ask a bit on the Chemicals side. First of all, the status of the Maoming factory expansion and whether that -- if that has reached full output, when did it do so? Of if not yet, when do you expect it to do so?

And the second question is, more broadly speaking, in terms of the strategy and the CapEx for the chemical sector. Where at this point do you see yourselves focusing on it over the next two years?

Was your first question about Maoming expansion?

Just the status of the output. Has it reached full output yet, and if so when? Or if not, when do you expect it to?

[Translated]. With regard to the Maoming cracker expansion, in the end of the third quarter we have already launched a commissioning [repeatedly]. And currently, judging from the operation of the commercial operation cycles, we believe there is [news]. And the incremental volume output for ethylene will be 100,000 tons.

Our CapEx strategy for the Chemical segment in future years has already been stipulated clearly in our three-year road plan and we'll implement such strategy in accordance with the three-year plan. And to be specific, we will further focus our effort in develop the ethylene project in Fujian, Tianjin and Jinhai. And for chemical fiber project, we'll focus our effort in the PX project of Jinling.

Thank you.

Thank you.

Thank you. The next question comes from Lawrence Lau of BOCI.

[Translated]. Two questions, first on the average realized crude price. I noticed that in the third quarter your crude realized price has been increased, that compared with BNPC's crude realized price it has been increased by about CNY4 per quarter. And according to my calculation, your incremental crude realized price is only CNY1 per quarter. So is there any reason behind this?

The second question, what did you -- how much did you pay for the special oil income levy?

[Translated]. Our average realized crude price in quarter three, there is not much growth. It's because of the -- according to the requirements of certain government departments, we have adjusted the price for the crude oil in accordance with its different grade and the varieties that we are refining. So that's why it will lead to not very much growth in our crude average realized price. And in terms of the special oil income levy, we paid CNY3.7b.

[Translated]. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Next question is from Gordon Kwan of CLSA. Please go ahead.

I have two questions, one is on the lifting cost. You show a 10% increase for the first nine months of this year. Do you expect this 10% increase to continue going forward, especially as oil prices have fallen?

And the second is on the natural gas price. You've shown a 14% increase year-on-year for the first nine months. Where do you see natural gas selling prices going forward?

And one more question is on the current ex-refinery prices for gasoline and diesel. Can you confirm to us what they are in October? Thank you.

[Translated]. Our lifting cost has been increased in E&P segment. It's because of the high oil price during that period. And during that period we captured some high cost blocks, but we think it is still under our economic analysis. In spite of this, we believe the contribution from this part of the high cost block is also better than what we have for the return on investment. And in time of oil decrease in the future, we will renew our evaluation for this part of high cost oil block. But currently we think that the economic value for this type of block is still positive.

Second, our natural gas increased by 14%. This product price is subject to the government's guidance price and the future trajectory for natural gas price is also under the government notice.

Thirdly, on the refinery price for gasoline and diesel in October, currently there is no change. It is also depend on the decision by the government. Thank you.

Thank you very much. Next call -- next question, I should say, is from Rachel Tsang of Daiwa. Please go ahead.

[Translated]. My question is about the retail stations. I notice that the number of your retail stations decreased in the third quarter. And what do you think is your strategy for the gasoline stations? And do you think you will control the total number of the retail stations?

[Translated]. In the end of the Q3 the number of our total retail stations decreased. Indeed, it's mainly because of the decrease in the number of our franchise stations. However, our self-operated stations increased in terms of its number. And this behavior is generated to [inaudible] and standardize our operation and management for the retail stations. We will further clean up those uneconomic and inappropriate retail stations and try to acquire quality stations and good stations in the meantime.

Our strategy for retail stations in the future is focused on quality improvement, namely to further enhance the throughput per station and try to capture advantages of those retail stations in transportation, arteries and in freight ways and good locations. So we will not control our total number of retail stations in the absolute number, but we expect the number will have a stable growth. Thank you.

Thank you.

Thank you very much. Due to time constraints, we are out of time. I'd now like to hand the call back to Jane Liu. Please go ahead, please.

Thank you, operator. Once again, to access the replay, please call 852-3012-8000. The access code will be 428557. You can also listen to the webcast replay on the Company's website at www.sinopec.com, starting 6.30pm October 31, Beijing time. Thank you again for your interest in Sinopec. Please feel free to contact either Sinopec or Christensen if you have additional questions. Have a nice day.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.