中國石化 (SNP) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Sinopec's 2007 Interim Results Presentation. With us today we have Mr. Su Shulin, Chairman; Mr. Wang Tianpu, Director and President; and Mr. Dai Houliang, Director, SVP and CFO.

The presentation will cover three sections -- overview, operational results, and operational plan. President Wang will take you through the overview, while Mr. Dai will cover the operational results and the operational plan. After that, we will open the floor to questions.

Now, join me in welcoming President Wang to start the presentation.

(interpreted) Ladies and gentlemen, good afternoon, welcome to Sinopec 2007 first half results announcements. Our presentation today includes three parts. First, I will give you an overview of first half performance. Then, SVP and CFO, Mr. Dai Houliang, will present first half operational results of each business segments and the second half operational plan.

China's economy maintained a stable and rapid growth in the first half. GDP grew by 11.5%, while demand for petroleum and petrochemical products kept good momentum. According to our statistics, domestic consumption of oil products rose by 4.2% year-on-year and that of ethylene-equivalent up by 8.4% year-on-year. International crude price evolved from low to high in the first half. Chemicals price remained high.

Domestic oil products price was still under tight control. Thanks to the concerted efforts of the management team and all the staff, the Company made new progress across all its businesses. We achieved steady growth in hydrocarbon production, refining throughput, oil product sales and output of major chemical products. Economic [benefits] rose significantly. Turnover and other operating revenues hit CNY566.8 billion, up by 15.39% year-on-year.

Net profit rose by 65.48% year-on-year to CNY36.2 billion. EPS was CNY0.42. Due to the profit growth and influence of depreciation and other factors, cash flow from operating activities surged to CNY61.6 billion. By end of June, long and short-term debts totaled CNY117.6 billion with debt structure further optimized. Net assets grew by 10.18% compared to the year beginning, to CNY289.6 billion.

ROC was 8.27% up by 2.84 percentage points year-on-year. Considering the Company's cash flow and the future development plan, the Board of Directors decided to distribute an interim dividend of CNY0.05 per share, up by 25% year-on-year.

Next, I will give the floor to Mr. Dai Houliang for first half operational results of each segment and the second half operational plan. Thank you.

(interpreted) Thank you, President Wang. The Company achieved very good operational results in the first half. In E&P, the Company made breakthroughs in exploration in Aiding area in Tahe Oilfield and the [buried hill] in Dongpu Mesozoic Era in Zhongyuan Oilfield. Several new discoveries were made in Puguang Gas Field and its surrounding areas. New progress was also made in the deep zone in Shengli Oilfield. The Company realized a favorable replacement ratio of both oil and gas, and laid solid foundation for further increase in reserves and production.

The Company strengthened the foundation of oil and gas fields development, optimized divestment plans, and accelerated production capacity building. We also implemented measures to boost production, optimize operation management, and to further tap output potentials. In the first half, the Company hit a history record in oil and gas production.

Crude production increased by 2.12% year-on-year to 144 million barrels, and natural gas production up by 10.58% year-on-year to 139.55 billion cubic feet. In the backdrop of high oil price, lifting cost rose to CNY550 per ton as we took measures to increase production and develop low yield reserves.

In the first half, average realized crude and natural gas price was CNY2,792 per ton and CNY800 per 1,000 cubic meters respectively. EBIT of the E&P segment dropped by 34% year-on-year to CNY22.75 billion. In refining segment, the Company maintained high load operational refineries, ensured oil product supply and met the demand for chemical feedstock.

We optimized resource procurement and supply structure and leveraged pipeline transmission potentials to reduce the cost of crude procurement, storage and transportation. Greater efforts were made and structure acceptance to increase the production of high value added products such as high grade ethylene lubricants. Refining throughput in the first half was 76.25 million tons, up by 6.38% year-on-year. The lost suffering refining segment turned to profit with a margin of CNY216 per ton and EBIT of CNY5.492 billion.

In marketing segment, the Company actively responded to market change, optimized resources and adjusted marketing structure to fully leverage the newly built storage and transportation facilities to ensure market supply. We also enhanced service awareness and improved service quality. In the first half, domestic sales of oil products totaled 57.92 million tons, up by 6.63% year-on-year.

Retail plus direct sales accounted for 79.7% of the total sales. By end June, the Company owned 28,898 retail sites among which 28,153 were self operated. The annual throughput per self operated station averaged 2,558 tons. EBIT of the marketing segment rose by 55.07% year-on-year to CNY16.8 billion.

In chemical segment, the Company reinforced meticulous management and the technology development, optimized inter supply of feedstock, improved online and utilization rates, and reliability of facilities, to fully tap production capacity that produced 3.27 million tons of ethylene, up by 8% year-on-year, increasing the output of all major petrochemical products.

The Company leveraged the advantage of unified sales and further enhanced its operation. In the first half, EBIT of the chemical segment gained by 38.31% year-on-year to CNY8.542 billion. The Company always takes resource saving as an important issue to realize sustainable development and to lay equal stress on development and saving.

By reinforcing management and promoting advantage technology achieved good results in energy saving and emission reduction. In the first half, energy intensity dropped by 3.95% year-on-year with industrial water consumption and water discharge largely decreased. Various measures were taken to reduce cost with a total reduction of CNY1.484 billion and reached E&P CNY387 million, refining CNY310 million, marketing and distribution CNY389 million, and chemical CNY398 million.

In the first half, the Company's CapEx was CNY33.746 billion, in which CNY18.277 billion were to E&P segment. A number of key production capacity built-in projects were completed and put into operation. Sichuan-to-East China Gas Transmission Project was in full swing. Newly built crude production capacity was 2.27 million tons per year and natural gas capacity was 719 million cubic meters per year. Refining segment was CNY6.18 billion.

Revamping of Yanshan refining facilities was completed. Key projects including Qingdao refining project were on [sound track]. Tianjin to Yanshan crude pipeline was completed. Chemical segment was CNY3.296 billion with smooth progress made in the ethylene projects in Tianjin, Zhenhai and Fujian. Marketing and distribution segment was CNY4.922 billion with the completion of [round city] oil product pipeline in Beijing and 307 newly added gas stations.

Corporate and others totaled CNY1.071 billion. A number of energy saving and emission reduction projects keep progressing. Now, I will present the second half operational plan. In the second half, China's economy is projected to grow rapidly creating favorable external conditions for the Company to expand its operation.

However, there are adverse factors which will impact production and economic returns, in particular the increasing pressure to meet domestic market demand and high oil price. International crude price is expected to fluctuate at high levels. Our refining and marketing segments will still be exposed to great pressure. Due to the rising cost of feedstock, chemical products prices are expected to remain high.

In the second half, the Company will implement active and effective measures in its production and operations. In E&P, the Company will continue to focus on exploration of key projects and production and operation management while maintaining stable production of mature blocks, accelerate production capacity build-in or from tier blocks including Puguang and Tahe, we plan to produce 20.74 million tons of crude and 4.05 billion cubic meters of natural gas in the second half.

In refining segment, the Company will keep high load operational facilities to ensure oil products supply. We will further optimize refining scheme by processing more heavy and sour crude and produce more high quality cracking feedstock to meet demand for chemical production. More efforts will be made in the sales of lubricant, asphalt, LPG, and petroleum coke. We plan to process 78.25 million tons of crude in the second half.

In the marketing and distribution segment, the Company will closely track the market trend, diversify resource procurement channels and coordinate product marketing, fully leverage the modern logistics system and optimized resource allocation, intensify operational management, rationalize sales structure and improve economic benefits. Domestic sales of oil products is expected to reach 59.08 million tons in the second half.

In chemicals segment, the Company will further emphasize on safer and stable operation of facilities, optimize product mix, coordinate production and marketing, and produce more technology intensified high-end products with premium quality and market competitiveness. We are in full play to the specialized operation of Sinopec chemical products sales company and enhance overall competitive strength.

We plan to produce 3.27 million tons of ethylene in the second half. We will continue to implement to operation feasible of reform, adjustment, management, innovation and development, and we will endeavor to accomplish our annual production targets and realize good performance. Thank you.

Thank you, President Wang and Mr. Dai. We will now open the floor to questions. May I please ask you to identify yourself by stating your name as well as the name of the institution that you represent? May I have the first question please?

(interpreted) First of all, I am from Merrill Lynch, and I would like to congratulate the Company for very fruitful result for the first half, and also my congratulations to Mr. Su for becoming the new Chairman of the Company. I have two questions. The first one is referring to Mr. Su on becoming the new Chairman of the Company.

What do you think for the -- what do you have for the new thinking of the Company's development strategy in the coming future? And the second question, regarding the Company's CapEx, in the first half CapEx was in that or achieved by 30% and what about the Company's second half CapEx? Will there be any change in the target?

(interpreted) Thank you very much for your question. After the change in the management, the institutional or the individual investors, as well as the media, they are concerned whether there would be any change in the strategy of the Company.

I would like to say the Company is a mature Company and the strategies were formulated by the Board of Directors, as well as the Company as a collective result of our decision making. Therefore, the strategy is based on the market and its future development, there won't be any change just due to the change in the senior management members.

However, this change or no change is also on the comparative term. Whenever there is market changes or internal changes, we have to rethink -- rethink about the Company's development strategy and we don't rule out any possibilities in the change of the Company's strategy if there is significant change within and outside the Company.

So, to sum up, the Company's strategy really depends on the market situation and also the Company's self-development requirements.

As for your question about the Company's future development strategy, the senior management also have made very careful thinking. In particular, I have just joined Sinopec and I have made several fact-finding missions to further understand the Company.

My conclusion is that the Company is really blessed with many advantages, which has been discussed in the interim report.

For these advantages, I would like to categorize as three plus two advantages.

The three means the Company itself has three direct or immediate advantages and the two refer to the parent company, have two advantages that will also benefit the Company.

For the three advantages, the first one is the unique advantage the Company enjoy in exploration and production.

After joining Sinopec, I also recognized or noted the comments from the -- from the investors as well as the public that the upstream segment is a relatively weak business link in Sinopec's overall value chain.

However, I have a different opinion to this comment. I think Sinopec's upstream business segment is not a weak segment.

If just starting from the reserve and production volume of the Company, it's a fact that the Company is small in its size.

However, the Company could fully extend this business segment by its own unique advantages and technologies.

The upstream technology I referred to not only include the unique technologies in the mature fields like Shengli, which enjoyed in the geological survey exploration development as well as petroleum engineering.

The advantages also include a latecomer in the Company, Sinopec National Star. This company is also unique in the regional geological survey, the reservoir evaluation and also pre-exploration.

In the Chinese petroleum industry, it's well known that Sinopec National Star has very strong capability in exploration development.

In addition to that, along with the joining of the family of National Star, Sinopec's registered acreage for reserves was also increased.

I firmly believe that by integration the mature fields, unique technologies, National Star's capabilities as well as the increased investment or input for the E&P activities, Sinopec is really prominent in its upstream technologies and other advantages.

A number of breakthroughs further reflect my above mentioned points, including the reserve and production increase in Shengli Oilfield and Tahe field, the discovery and development of Puguang Gas Field, the exploration and discovery of [Dangyungdi] field, also in the deep layer zone in the West part of Sichuan and [Liaoning] and Shandong provinces. And I would like to say, these synergies are just beginning to roll out.

The second advantage of the Company I would like to categorize in the refining, chemical and marketing.

I believe everyone knows that Sinopec is the third largest refiner in the world and the fourth largest chemical producer in the world.

Sinopec's competitive strength is permanent in China in terms of refining, chemical and marketing businesses.

The Company's major refining and chemical subsidiaries are located in the eastern and southern parts of China, where the economy is more dynamic. And such ideal location also give the Company competitive strengths in positioning.

Such unique advantage in the positioning of refining and chemical subsidiaries also promise internal and external development opportunities for the Company.

In addition, the Company's marketing network also cover the most dynamic regions in the eastern and southern part of China.

We have also developed a modern logistic system.

We have also built good brand loyalty and also the good corporate image.

The Company's technologies have already reached the international leading level for refining and chemical business. And some, even highly competitive in the world.

The Company is able to build refineries with 10 million tons of capacity and ethylene crackers of 1 million tons capacity in the R&D's aspect and also the construction and engineering.

We have formed the refining and chemical complexes along the Yangtze River Delta, the (inaudible) river area, and also the [Yohaipei] area.

Sinopec's value chain is complete, and the marketing as well as production system are matched together closely.

The Company enjoyed significant synergies in the refining and chemical integration.

As a result, the Company will fully -- further bring -- bring out the advantages in the refining, chemical and marketing business to make this strong business [links] even stronger.

The third strategy the Company enjoyed is the optimization in terms of international trade.

The Company now has a crude processing volume of about 160 million tons every year.

The Company's self-produced crude was about 41 million tons, and every year the Company imports about 120 million tons crude.

Out of the 120 million tons of import volume, about 100 million was conducted by UNIPEC, the Company's crude trading arm.

Through years of effort, the Company has established very diversified crude sources and international trade network.

On this context, the Company is able to select the crude types to match its specific refinery schemes.

Meanwhile, the Company has also established good business relations with the major oil producing countries and major crude traders.

The Company has also integrated its international trade system and has developed a talent pool for the international trading activities.

The Company thinks that to sustain these advantages in international trade would safeguard and meet the demand for further development of the Company.

This advantage can help the Company to obtain resources -- optimize resources supply, reduce cost, and also improve its economic returns.

Apart from the three advantages of the Company itself, its parent Company, China Petrochemical Corporation, has also advantages in the engineering and technology services for upstream as well as downstream, and also the global presence in terms of upstream resources.

The Company's advantage in the upstream and downstream engineering and technology services could provide on-time tailor-made services to the Company.

In particular, the service price is highly competitive to compare with other international service providers.

The parent Company is also expanding very fast in terms of overseas assets allocations.

Currently, the parent Company has about 74 blocks or assets throughout the world with the year-end recoverable reserves at 120 million tons.

The Company's equity crude from international locations in 2006 was 5.5 million tons.

For the target in the 2007, the equity crude production for the parent Company would reach 7 million tons, and in the first half, all together 3.16 million tons of crude will be produced.

We fully believe that to make a thorough understanding of the Company's advantages as well as to bring all the advantages into full play will further promote the Company's future development.

Regarding your second question about the CapEx for the first half and whole year. The Company made no change in the CapEx for the year 2007.

The CapEx for the first half was relatively small, was due to the fact that it's not the high peak season for the construction of all the projects.

All the projects for this year have been now starting the operation and construction, and we expect in the second half all progress will be made. Therefore, the construction will be fully developed.

So far, the major projects progress are also in alignment with the Company's preset target.

(interpreted) Thank you very much.

Can I have the next question please? Not everybody at the same time. Next question please?

(interpreted) I have three questions for the management. The first one, regarding the newly built refineries under construction. For the newly built refineries, does the Company plan to, of course as the high sulfur content crude, and if so, what -- in what percentage the refineries will be able to process?

And the second question is about, for how much did the Company submit in terms of special oil income levied for the first half?

And the third question regards the construction progress of the Sichuan-to-East China Gas Project, as well as the schedule of the project.

(interpreted) Your question -- for your question regarding the refineries, I would like to invite President Wang to answer, and for the question regarding the special oil income levy, I leave this to our CFO, Mr. Dai.

For the Sichuan-to-East China Gas Project, we have already started the construction, and the capacity building is also in full development as well. In the meantime, the processor is also under construction.

At the end of this month or at the beginning of the next month, there will be a formal inauguration ceremony for this project, but this won't have any impact on the schedule of the project in construction.

As for the question of when the project will start production, we expect to start production in this project by the end of 2008 or by the end of June 2009, and the complete finish of this construction job will be a little bit later than that due to the safety concerns.

(interpreted) The refining capacity of the Company has reached 178 million tons currently. However, in alignment with the requirement of the Chinese market for the refined products, the Company expects to increase 50 million to 60 million tons in the 11th five-year plan period.

If we look at the international price in particular, the price spread between the high sulfur content heavy and sour crude, to compare with that of low sulfur content and light crude and in -- and also in addition to this, the future production will mainly come from the high sulfur content of poor quality crude. The Company's plan to build or revamp its future refineries will be based on the major -- the major target will be to process the poor quality crude.

For the sulfur content, the refineries will be able to process crude with sulfur content of 2%. We also made some revamping on the refining subsidiaries, and the sour crude process capacity could reach [1.] And out of these process, the refined would meet the [national specs] standard for refined oil products. These activities may require increased investments. However, if we think about the degradation of the crude quality, we firmly believe that such investment will bring even more better economic return.

Thank you.

(interpreted) For the special oil income levy, the Company submitted a total of CNY3.29 billion in the first half. Thank you.

Next question please?

My name is Prashant Gokhale from Credit Suisse. Just two questions on the pricing for refined products. The government has not changed refined products basically, I think, but could you give us an outlook for what the government is thinking in terms of refined product prices? That's one.

And the second is, if the government doesn't change product prices in China for the second half, what would have happened to your profits in July and August? What do you expect compared to the second quarter, given the July and August is already over nearly? Thank you.

(interpreted) The question of the pricing for the refined products has remained there for a long time. However, the Company really does not know very well what the government is thinking about and what the government would do.

For the first half, the refining segment EBIT was a little bit better than the expectations, was out of the reasons such as the improved technologies for refining the concentrated and integrated purchasing of the crude source, and also the elevating of the refinery competitive strength. In the backdrop of a national macro control or adjustment over the refined oil products price, we are still able to deliver a better to some extent than expectation result in the first half.

Everyone is very concerned about the pricing issue about the refined products.

This issue is not only a pressure for the Company's operation and production. However, more significantly, we see this issue as a driving factor for the Company's future value appreciation.

Thank you.

Next question please?

Good afternoon, I am [Gordon Qwan] from CRSA. I have two questions. The first one is your total oil and gas reserves did not go up at all in the past six months, particularly for gas. When would you start booking the Puguang gas reserves?

And the second question is why did your cash operating cost for both refining and marketing go up so sharply in the past six months? Thank you.

(interpreted) There is no significant increase in the natural gas reserve mainly due to the fact that the Puguang Gas Field reserve has not yet been ready to be booked according to the SEC requirement.

However, the reserve has been calculated or evaluated based on the -- based on China's national reserve evaluation standard. And the Company is working on meeting the requirements by the SEC to be able to book the reserve.

(interpreted) Regarding the cash operating cost for the refining business, just now we have touched upon a little bit, that is the overall target for the refining segment is to achieve an increase in the EBIT, and we mentioned that the Company purchased crude proportion for the poor quality crude has been increasing.

Therefore, the purchasing cost reduced. However, the processing cost increased. This is because the [national specs] requirement is not loosening just because of the poor quality crude. However, if you offset those increase in processing costs and the decrease in the purchasing cost, the overall economic return is positive.

I would like to add, regarding the second part of the question for Puguang reserve booking, we expect by year 2008, we will be able to book the reserve.

And as for the operating cost for the marketing segment, there are mainly two reasons behind it. The first one is the increase in the overall marketing volume. Therefore, the cost or expenses have also increased. And the second reason was the Company wishes to improve its -- further improve its competitive strength, and we carry out some campaign, including the upgrading of the retail station's facilities. And this also leads to an increase of CNY600 million. Thank you.

And this conclude our presentation for today. Ladies and gentlemen, thank you for joining us and please join me now in congratulating Chairman Su and his team. 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.