中國石化 (SNP) 2007 Q1 法說會逐字稿

Welcome all and thank you very much for attending Sinopec's first quarter 2007 earnings conference call. Reporting the results are the company's Director, Senior Vice President and CFO, Mr. Dai Houliang; Mr. Chen Ge, Secretary of the Board of Directors; [Madam Wong], Deputy CFO; as well as the heads of some business units.

Before we begin this presentation, I would 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 management's 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 would now like to turn the conference over to Mr. Dai. Mr. Dai, you may begin.

[interpreted] Good morning ladies and gentlemen. Welcome to the conference call for Sinopec 2007 first quarter results announcement.

Next, I would like to invite my colleague, Mr. Chen, to read out the first quarter results. Mr. Chen, please.

Ladies and gentlemen, good morning. Welcome to Sinopec's results announcement conference call, for the first quarter of 2007.

Market environments of the first quarter. In the first quarter of 2007, the Chinese economy maintained a stable and rapid growth, boosting the sound growth of domestic demand for refined oil products and petrochemical products, along with the volatile and high international crude price, which has already dropped to a certain extent.

Chemicals prices remain at a relatively high level. The company adhered to the principle of reform and adjustment. Management innovation and development, set up by the Board, actively responded to market variation, focused on [HSE], reduced costs, accelerated structured adjustments, reinforced corporate management, promoted technical innovation and maintained growth in oil and gas output, crude throughput, gasoline production and sales volume of refined oil products. Good operational results were achieved.

Operational results. Turnover and other revenues for the first quarter of 2007 added 23.1% year-on-year to RMB279.639 billion. EBIT reached RMB29.453 billion, a year-on-year increase of 91.1%. Profit, attributable to equity shareholders of the parent, was RMB19.444 billion. EPS gained a growth of 103.7% year-on-year to RMB0.224.

Financial performance. By March 31, 2007, the company's long-term and short-term debt totaled RMB120.992 billion, dropped by RMB2.337 billion, compared with the end of 2006. Equity attributable to equity shareholders of the parent was RMB282.289 billion, increased by RMB19.444 billion, compared with the end of 2006.

In the first quarter, net cash flow from operating activities was RMB30.206 billion, while net cash flow for investment activities reached RMB16.125 billion. The long-term and short-term debt decreased to a certain extent.

E & P segment. In the first quarter, the company achieved new progress in North East Sichuan, Eastern mature blocks, Tahe in the West [essentially], which set a solid foundation for resource replacement. In the first quarter, the Company produced 70.96 million barrels of crude oil and 70.46 billion cubic feet of natural gas, up by 2% and 10.1% year-on-year respectively. The lifting cost rose by 9.1% year-on-year, to RMB475 per tonne, which was mainly due to the increased operations in low-yield reserves.

With the drop of international crude prices, in the first quarter of 2007, our realized price of self-produced crude decreased by 17% year-on-year. Meanwhile, EBIT for E & P segment totaled RMB11.654 billion, down by 32.2% year-on-year.

Refining segment. In the refining segment, the company actively optimized resource allocation and the products mix, processed more low-quality crude and increased output of high value-added products. In the first quarter, the company's crude throughput increased by 5% year-on-year.

Since the latter half of 2006, with international crude prices dropping from the historical high, the company captured market opportunities, increased low-quality crude throughput and reduced crude purchase costs by a big margin. Due to the maintenance expense for the low-quality crude processing and increased production of high value-added products, the cash operating costs for the segment rose. In the first quarter, the refining margin was RMB328 per tonne and EBIT was RMB4.173 billion.

Market segment. In the marketing segment, the company strengthened resource planning, optimized marketing network and logistics. The total sales volume, retail volume and number of self-operated service stations, further increased. In the first quarter, the company's domestic sales volume and retail volume of refined oil products grew by 5.5% and 3.4% year-on-year respectively. With the increase of sales volume, the EBIT from the marketing segment in the first quarter reached RMB7.741 billion, up by 133% year-on-year.

Chemical segment. The company kept full-load and a stable operation of main chemical facilities, leveraged on the strength of an integrated marketing channel and a steadily increased production and sales volume of chemicals. In the first quarter, ethylene production and synthetic resins output increased by 7.8% and 13.9% year-on-year respectively. In the first quarter chemicals prices still stayed at a high level with continuous growth of chemical production EBIT for chemical settlements, increased by 97.6% year-on-year, to RMB6.196 billion.

CapEx. The CapEx for the first quarter of 2007 was RMB15.15 billion, in which E&P was RMB6.927 billion, with newly added crude production capacity of 880,000 tonnes per year and natural gas production capacity of 269 million cubic meters per year. The preparation work for Sichuan to East China gas project went down smoothly. Refining was RMB4.377 billion, which was mainly used for crude works, crude pipelines, Qingdao refining project and the revamping of refining facilities in Yanshan, Guangzhou and Gaoqiao.

Chemical settlements was RMB1.729 billion, Maoming ethylene expansion and Shanghai ethylene glycol project were completed downstream. Tianjin ethylene, Zhenhai ethylene and the Jinling PX projects were fully launched. Marketing settlements was RMB1.97 billion, with 74 newly added service stations and new progress in pipeline developments for refined oil products. Corporate and others totaled RMB147 million.

Thank you. Now, my colleagues and I are happy to take your questions.

Operator, we can proceed now.

[OPERATOR INSTRUCTIONS]. The first question from Kelvin Koh of Goldman Sachs. Go ahead please.

Hi. Congratulations on the strong year-on-year increase in your results. Just a quick question on two things. Number one, your realized crude oil price discount to the key international brand benchmarks seem to be rising, can you briefly comment on why that's the case?

The second question is, for your marketing segment, the EBIT for the fourth quarter was about RMB9.7 billion and the for the third quarter was about RMB9.8 billion, but for the first quarter that's come down to RMB7.7 billion. Can you give us some sense on what's happening and you know, what are the realized margins for the first quarter of this year, compared to the fourth quarter of last year? Thank you.

[spoken in Chinese].

I think you translated my first question wrongly. The first question was, you know, why is the discount of the Company's realized crude oil price relative to the international benchmark increasing, rather than you know, the year-over-year rising for the international drop in falls, Sinopec.

[interpreted] Well, starting from April 2006, with the consent of the relevant Chinese Government authorities, the benchmark price for Sinopec's produced crude oil was shifted from the original [Sinta] to the current [Duri], so the first quarter -- in the first quarter of this year our realized Sinopec crude price was dropped. If you calculated from the first quarter of last year to link with [Duri] actually our realized price in the first quarter for our own produced crude has actually increased.

[interpreted] The first question regarding the marketing EBIT drop, I think this is mainly owing to the sales supporting structure changes. You can see that the number of days in the fourth quarter last year is more than the days in the first quarter of this year. This gave rise to a delta of 2% and also in the first quarter of this year, we met the -- two holidays. One is January 1 and the other is the Chinese traditional spring festival, so the total sales fall in the fourth quarter last year is larger than that of -- in the first quarter of this year. However, when you compare with the sales volume in the first quarter 2006, our first quarter 2007 sales volume actually increased year-on-year.

[Inaudible].

Thank you very much.

Next question is from Rachel Tsang of Nomura. Go ahead.

[interpreted] Good morning, I have two questions. First of all, we understand that the Company had very good operational results in the first quarter of this year, so my question -- first question regarding the marketing margin, so what is your expectations on the margins in the marketing segments in the second quarter of this year? Do you think it will be flat, or it will be increased and what will be the refining margin -- the marketing margin for the whole year 2007? What is your expectation for the next three quarters?

The second question is, what do you say about the second quarter refining cost in average?

[interpreted] Regarding the commercial marketing segment in the next three quarters, I believe it is related to the international crude price changes and also the pricing of refined oil products in the domestic market.

Regarding the international crude price, I believe everybody has his own judgment and nobody can very accurately forecast a crude price.

Regarding the pricing of refined products in China, I believe our chairman has explained in more detail already in the announcement for the annual results of 2006, one week ago. However, we are confident to achieve a good results in the next few quarters of -- in the refining -- in the marketing segments.

In response to your second question, I believe the performance of the refining segments is also very much related to the international crude price level and the pricing of domestic refined products. We are -- the company is confident to control our cash operating costs in the refining segments. You know that Sinopec has been able to improve and enhance its capability to process low quality crude and we are confident that we are in a much better place compared to international peers with regard to the low quality crude processing capacity. Thank you very much.

[spoken in Chinese]

The next question is from Lawrence Lau of BOCI. Go ahead.

[interpreted] I have two questions, all related to refining segment. In your presentation, you mentioned that the company has improved its capability and throughput of low quality crude in the first quarter. So, can you give us an idea the volume of processed low quality crude in the first quarter of this year?

The second question is, what was the refining margin in the first quarter?

And a follow-up question is, we observed from the presentation material that the refining yield has been dropped, so what is the reason on that?

[interpreted] Low quality crude processing volume accounts for some 30 to 35% in our total processing volume every year.

Refining margin in the first quarter, RMB328 per tonne.

The reason for the lowering of refining margin and light -- refining yield and light yields is, because during the first quarter our maintenance work are increased and at the same time, processing low quality crude is a positive factors the overall company performance. But, however, processing the low quality crude will, to some extent, have a later impact in our technical and economical data.

[interpreted] Thank you very much.

The next question is from [inaudible] from CBS. Go ahead.

[interpreted] Hello, I first of all congratulate the company for the good result achieved in the first quarter. I have two questions. First, the lifting costs in E&P segment increased by some 9% in the first half. What is the trend for the next three quarters this year for the lifting costs?

Second, presumably, if the refined oil products price mechanism remained unchanged in China this year, what will be your breakeven point for -- in terms of international crude price? Thank you.

[interpreted] For the lifting costs in E&P segment, you may observe that the lifting costs for the E&P segment in whole year 2006 dropped by 9% at the end of 2006 and in the first quarter this year, we have made some measures in further enhancing our existing crude production, which gave rise to a flat increase in the lifting costs in the E&P segment. But however, when you compare the figure with the fourth quarter lifting costs, actually the lifting costs were actually dropped by some 28%, so this year we -- the company have the confidence to further control, the lifting costs in the E&P segment in the next three quarters.

[interpreted] In response to your second question, I believe our chairman has already explained during the 2006 full year results announcement, which is that if the domestic refined oil products price remain at the current level, or remain unchanged, the breakeven point with regard to the procured crude oil for Sinopec -- by Sinopec, is $60 per tonne -- per barrel sorry.

And I would like to add -- one more comment is that owing to the increased volume of low quality crude processing in our refineries, there is a quite big spread between the price of low quality crude and [Brent]. Thank you very much.

The next question is from [Tony Tsang] from CICC.

[interpreted] I am from CICC. I have one question regarding the chemicals segment. We observed in the presentation that the first quarter chemicals margin is relatively the same, or a little bit lower than that in the fourth quarter last year, however the EBIT in the chemicals segment in the first quarter increased, so what is the reason?

[interpreted] Basically, the chemical market in the first quarter of this year remains flat compared to that in the fourth quarter last year. The reason behind the increase in the EBIT for the chemicals segment lies in two factors.

First, the increase of our chemicals production capacity. You understand that the Maoming ethylene project was put into operation in the second half last year and in the first quarter last year, the capacity in BYC and Secco has not been fully leveraged, but this year -- in the first quarter of this year, the production capacity in these two large joint venture ethylene projects, has been brought into full play.

The second reason is that we fully leverage our comparative advantages in the centralized chemical products sales channel and at the same time our -- certain of our products has been selling at a good price and in big volumes, for example the oxo-alcohol. Thank you.

The question is from [Andrew Chan] of HSBC. [OPERATOR INSTRUCTIONS]. Go ahead Andrew.

First question is, when you mention $60 per barrel oil, which type of oil are you talking about?

Second question is, what was your refining margin in March and in April?

And the third question is, is this new oil product pricing mechanism, is it in operation right now? Thanks.

[interpreted] The $60 per barrel, we're not referring to any specific types of crude. This is the average price for the crude procured by Sinopec in the markets.

The refining margin in March was around $4 per barrel and the refining margin in April, as we expect, will also be positive and quite well.

Regarding the pricing mechanism for refined products in China, actually this is a topic that has been mentioned repeatedly from the beginning of 2006 until most recently the annual results road show. And most recently, officials from NDRC also mentioned about the refined oil products pricing mechanism. We believe their comments and their sayings could be more official to represent the Government's idea. To my opinion, the refined oil products pricing mechanism is there, is prepared, but however, the implementation of this pricing mechanism will not be made overnight; it is a gradual process. Thank you very much.

[OPERATOR INSTRUCTIONS]. I have another question from Kelvin Koh of Goldman Sachs. Go ahead.

[interpreted] A follow up question from Goldman Sachs. What is the average crude price in the first quarter in your refining segment?

[interpreted] Are you referring to the processing cost, or the crude procurement cost?

Crude procurement cost.

[interpreted] In the first quarter our refining -- the cost in refining segment was RMB3,174 per tonne.

Thank you very much.

The next question is from Florence Tan of ICIS. Go ahead.

[interpreted] Hello Mr. Dai, I have two questions. Can you give us an idea about the performance of the chemical segment in the second quarter?

The second question is about the ethylene projects, we are understand that a [inaudible] ethylene project and a [inaudible] ethylene project has already been [put on stream] so, what is the kind of status for -- who has ethylene project and [Qiangao] ethylene project?

[interpreted] In response to the second -- first question, the chemical market in China stays in good shape in the chemical cycle and this is quite open market and based on our first quarter performance in the chemical segments, we are confident that we are going to achieve good results in the rest of the year. It is correct for you to say that a [Tianjin Zhenhai] has achieved good progress for the asking [inaudible] and also does the Fujian [inaudible] project which is a joint venture amongst Sinopec, ExxonMobil and Saudi Aramco.

[Inaudible] ethylene project. This project has most recently been confirmed by the relevant government authorities and the working team are working on this project as scheduled. [Inaudible] ethylene project, currently we are talking with our partners to conduct some preliminary preparational work for the [Guangzhou] ethylene project.

[interpreted] Thank you.

[OPERATOR INSTRUCTIONS] I have a question from Bing Wang from Merrill. Go ahead.

[interpreted] My question regarding the producing the ratio between gasoline and diesel. We understand in the first quarter 2006 the diesel to gasoline ratio is 2.5 however, in the first quarter in 2007 this diesel to gasoline ratio has been dropped to some extent. Can we understand this is because the Company has been processing more [inaudible] crude, or other low quality crude and what will be the future trends for the diesel to the gasoline ratio?

[interpreted] Well, thank you for asking such a professional question. Actually, Sinopec has been putting emphasis on the good balance between the diesel and the gasoline output. Actually, the diesel and the gasoline ratio is -- determines according to the market demand and Sinopec with this refining capacity and we have the full flexibility to adjust ourselves to meet with the market demands, so basically there's no [inaudible] relations for the diesel gasoline ratio towards the processing of low quality crude. However, in the first quarter this year we, in response to the market demand in China, our output projective increased by a big margin.

Thank you.

[interpreted] So a follow up question is that the gasoline output was increased by some 6% year-on-year. However, we don't see such a large increase in domestic demand for gasoline products.

[interpreted] Well, actually, our gasoline outputs is very much responsive to the domestic demands for that kind of product. You understand in the first quarter, usually diesel consumption was quite low and with further increase -- with further improvement the Chinese economy and the improvement of people's living standard, gasoline demand in China will definitely increase, so we are going to adjust ourselves to flexibly meet the market demand.

Thank you very much.

[OPERATOR INSTRUCTIONS] We have the last question from Florence Tan, again of ICIS. Go ahead please.

[interpreted] My question is that we understand Sinopec has been involving in some sort of discussion or negotiation with [Sardic] regarding the changing gasoline project. Do you think this negotiation process will affect or have some impact on the total schedule of changing gasoline projects?

[interpreted] The company has been keeping contact and keeping negotiating with [Sardic] regarding changes here, changing gasoline project. However, the mutual consent, or common understanding among the two parties is that we keep our negotiations, but such kind of negotiation will not delay, or affect the overall project schedule.

Okay.

Thank you very much.

There are no further questions at this time.

Yes, we will go through it at this stage. Once again, to access the replay of the conference call please call 852 3006 8101. The access code will be Sinopec call. You can also listen to the webcast replay on the Company's website at www.sinopec.com starting at 5.00 pm on April 16 Beijing time. Thank you all again for your interest in Sinopec, but please feel free to contact either Sinopec directly, or [Christiansen] if you have additional questions. Have a good day or a good night depending on where you are. Thank you all.

Thank you very much for joining us. Thank you.

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.