中國石化 (SNP) 2007 Q3 法說會逐字稿

Welcome and thank you very much for attending Sinopec's third quarter results conference call. Sinopec is hosting this conference call from Beijing and reporting the results are Mr. Dai Houliang, CFO, Mr. Chen Ge, Secretary of the Board of Directors, Mr. [Lu Yung], Deputy CFO as well as the heads of certain operations.

Before we begin this presentation I would like to remind everybody of Sinopec's safe harbour 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). Ladies and gentlemen, good morning, welcome to Sinopec's third quarter 2007 results announcement conference call. We have listed our results, our slides and the webcast. Please refer to these results and the webcast. To save more time I would like to ask Mr. Wang Jiming, the interpreter of Sinopec, to deliver the third quarter 2007 results in English. Mr. Wang, now please go ahead.

Good morning ladies and gentlemen, welcome to Sinopec's third quarter 2007 results conference call. During the first three quarters of 2007 China's economy maintained rapid growth with GDP up by 11.5% and demand for petroleum and petrochemical products increased at a good momentum.

In Q3 '07, despite the pressure from surging international crude price on our production operation, the Company's strategic production management and synergized production and marketing, [certainly] pushed forward key construction projects, focused strong [result] conservation and emission reduction, ensured safe production and market supply and achieved very good operating results.

According to the International Accounting Standard, during the first three quarters our revenue totaled CNY875.218b, up 13.62% year on year. EBIT amounted to CNY74.065b, up 38.28% year on year. Profit attributed to shareholders reached CNY49.818b. EPS was CNY0.575, up 43.21% year on year. As of September 30, 2007 our short term and long term debt totaled CNY109.725b, down CNY4.716b than that of the year beginning. Equity attributed to shareholders were CNY298.907b, up 13.72% than the year beginning. During the first three quarters of 2007 cash flows from the operating activities of CNY98.486b. Cash flow used in investing activities was CNY69.158b. Cash and cash equivalent ending balance was CNY8.343b, up by CNY1.664b than the year beginning.

For the Upstream during the past three quarters with a strong crude price we expedited capacity [using] and developed low used reserves to steadily build up oil and gas output. Construction of the national key project, the Sichuan to East China Gas Transmission project was kicked off smoothly. We produced 30.69m tons of crude oil and 5.976 bcm of natural gas, up by 2.23% and 11.74% year on year respectively.

For the first three quarters crude realized price averaged CNY2,955.57 per ton, down by 12.76% year on year. Gas realized price averaged CNY809.94 per thousand cubic meters, up 7.89% year on year. Lifting cost was CNY557.91 per ton, up by 18.62% year on year. EBIT was CNY37.265b, down by 29.15% year on year.

In the Refining segment the Company made efforts to re-adapt structure and optimize the resource allocation, procurement and constructing to increase production and ensure market supply. Crude processed was CNY115.8m tons, up 6.53% year on year. Refined product output was CNY68.83m, up by 6.33%. Impacted by the tight control of the refined product price, refining margin in the first three quarters was CNY194 per ton. EBIT was CNY214m.

In Marketing segment the Company actively sourced hydrocarbon resources (inaudible) [brought] to ensure stable and orderly the supply to domestic market. Really focused on our modern logistic system including product pipeline to well organized distribution and transportation of oil products, the Marketing structure was further optimized.

For the first three quarters total sales volume and Retail volume reached 88.57m tons and 55.82m tons, up by 6.63% and 4.55% respectively. By end of September Retail side totaled 28,980 in which 28,280 were self [formed] and operated. Annualized throughput per self operated station averaged 2,632 tons, up by 2.57%. In the first three quarters EBIT of the Marketing segment was CNY26.026b, up by 26.49% (sic - see documentation).

In Chemical segment safe and stable operation and high utilization were achieved with increased output on major products and high value added products. The Company leveraged on the specialized offering of chemical products sales company to further sharpen our competitive edge to minimize market in China. For the first three quarters output of ethylene and synthetic resins were 4.887m tons and 7.207m tons, up by 7.79% and 14.6% respectively. In the first three quarters EBIT of the Chemical segment was CNY11.097b, up by 8.32%.

CapEx in the first three quarters totaled CNY59.91b, in which E&P was CNY30.807b. Refining was CNY12.178b. Chemical was CNY7.207b. Marketing and Distribution was CNY7.948b. Corporate and Others was CNY1.77b.

That's all for the briefings on the first three quarters results. Now, Mr. Dai Houliang and his colleagues would be happy to take your questions. Thank you very much.

Operator, please can we have the first question?

Thank you. (OPERATOR INSTRUCTIONS). The first question is from Prashant Gokhale from Credit Suisse. Please go ahead.

Good morning sir, thank you for the presentation, just a quick question. There have been press reports recently about diesel shortages in China. Could you tell us if these diesel shortages are because of production constraints or because demand is exceptionally strong? Thank you.

(Interpreted). [Normally] speaking, the supply of the diesel in China is stable. There may be some particular situation in certain specific regions as a result of a number of factors. First of all, the demand for diesel is growing and because of the impact of natural gas the transportation, in the transportation channel there have been some force majeure factors happening. But, [normally] speaking, we believe the supply of diesel in China is stable and steady. Thank you.

Yes. Then could I just have -- ask an additional question? When you say that because of natural gas, what do you exactly mean by that? How is that, how does that impact diesel demand if you could just explain?

(Interpreted). To be specific, impacted by the hurricane in the past period, there are some impacts, negative impacts inflicted our specific retail stations. And so, we have some, encountered some force majeure factors in those specific retail stations because of the hurricane and some weather conditions.

Thank you sir. Thank you very much.

Thank you. The next question is from [Upin Law] of [FiNet]. Please go ahead. Please go ahead.

(Interpreted). My question is currently given the high cost and the low retail price there are some retail stations who are reluctant to sell the diesel. What impact does this have to your Refining segment?

(Interpreted). Because of the international oil price hike in 3Q and the tight control by the state government for the oil product price in China, there are some retail stations in China who now stop to sell certain gas products because of those reasons. And this inflicted a certain impact of pressure on Sinopec's supply to the market. There are some impacts on our Refining segment, which could be fully demonstrated by the figures from our 4Q to 3Q results and in EBIT figures. But for the Chemical segment, as you asked, there are no big impacts on our Chemical segment.

(Interpreted). Were there any negative impacts on your high end segment? Do you have a certain solution?

(Interpreted). On the technical side we will try to lower our purchase cost and in the meantime to minimizing the pressure on our Refining segment. On the market side we will try our utmost to fulfill our social responsibility as a big company to supply the market.

Thank you. (OPERATOR INSTRUCTIONS). The next question is from [Florence Tan] of ICIS. Please go ahead. Please go ahead Miss Tan.

Hello?

(Interpreted). Hello.

Hello. Can you hear me?

(Interpreted). Yes.

(Interpreted). I have three questions from ICIS. What will be the time schedule for the production time for Xinhau Refinery project?

Second question, given the current higher international oil price what impact it will have on your 4Q EBIT and earning growth?

And third question, with regard to the Guangdong Refinery and Chemical project will Shell [quote], or not?

(Interpreted). Let me first address your first question. With regard to the Xinhau Refinery project everything is now on track according to our schedule. By the end of this year and the 4Q 2008 some key equipment will be constructed and completed. And we expect to have the commissioning of the project by the 2Q next year.

And with regard to the impact of the high international oil price on our Refining segment, I believe everyone in the public could give some certain analysis.

With regard to the Guangdong Nansha project, currently it is still in a preliminary period and the front end negotiation discussion. So far, we are not aware of any information that Shell is intending to [quote].

Thank you.

Thank you. The next question is from Lawrence Lo of BOCI. Please go ahead.

(Interpreted). I'm from BOCI. I have three questions. Firstly that with regard to the Refining segment for the first three quarters what is the mix or proportion of the processing amount of your low grade crude as a total of your -- among your total throughput?

A second question is on the cash operating cost for your third quarter. How much is changed as against of last year?

And third question, given the last year's performance there was a quite big loss from the first quarter to third quarter. Will you be granted subsidies this year as you were in the last year?

(Interpreted). With regard to your first question, currently the crude throughput proportion for the height of high acid and the low grade crude amount for 60% of our total crude throughput. But for the really low quality or low grade crude the proportion is simply 20% of the total.

So, from the first quarter to the third quarter the figures of our crude processing could be list as follows, for the 1Q CNY56, 2Q -- sorry, $56 per barrel as the price assumption, and 2Q $62, 3Q $68.

On the one hand we have tried to minimize our purchase cost. On the other, we try to increase the volume of the crude processing for the low grade crude, which fully sharpen our competitiveness in refining segment. Besides, about one-third of our products are fully in line with the market price internationally. For example, the Napa, its price is now fully in line with the in Singapore market price, which also keeping up our competitiveness in the Refining segment.

With regard to the Government subsidy, I cannot give you a specific answer, because it is the business of the Government.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). The next question is from [Calvin Co] of [Coleman]. Please go ahead.

(Interpreted). Could you please shed some light on the gas transmission project from Sichuan to Guangdong in terms of its volume, the CapEx and time to go?

(Interpreted). Are you asking the project from the Sichuan to East China?

(Interpreted). I'm asking -- I'm enquiring about currently do you have any intention to study the gas project from Sichuan to Guangdong?

(Interpreted). After we discovered Puguang gas field we also located some good process reserves in the other regions of Sichuan Province. Currently the Company is still planning for the front end study. I believe this is quite much under the public attention. We would thank you for the attention. And if we locate some specific reserves for the accurate information we will try to disclose on a timely basis.

(Interpreted). Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Next question is from Prashant Gokhale from Credit Suisse. Please go ahead.

Two questions on the Sichuan gas. Could you tell us how much of the Sichuan gas -- the Puguang gas are you planning to sell in Sichuan? And is there any specific plan to sell a part of that gas in Sichuan?

And the second question is how much gas do you expect to use in your own refineries and your own petrochemical plants to substitute for refinery fuel and chemical plant fuel?

(Interpreted). With regard to your first question, a large amount of the natural gas from the Puguang will be mainly supplied to the East China where there are quite [the large] demand for natural gas. But there are some portions of gas that will be reserved for Sichuan province to develop its own chemical industry and supply the local market. For Sinopec, we will reserve about 1b cubic meters natural gas from Puguang to substitute our fuels and chemicals feedstock. Thank you.

Thank you. I also had one other question if I may.

(Interpreted). Okay, please.

Okay. There's a lot of talk about Sinopec buying the overseas assets from the parent. Could you give us a comment? And I understand that if you're doing it you can't tell me. But would you at least give us the thinking behind -- what management is thinking in terms of the overseas assets and what your priorities are and what your timeline is on this?

(Interpreted). With regard to the purchase of overseas assets of the parent company, Sinopec Corp has the first right of refusal to purchase the overseas assets of the parent. But currently we have no concrete plan or proposal on that.

Thank you. Thank you very much.

(OPERATOR INSTRUCTIONS). The next question is from Henik Fung of HSBC. Please go ahead.

(Interpreted). Compared with the Upstream business, the crude realization, in 3Q 2006 and 3Q 2007 there is no big differential. But for the EBIT of the 3Q 2007 E&P business, we witnessed that there was quite a noticeable drop in the EBIT by 16% to 17% (sic - see documentation). Is there any reason behind this?

(Interpreted). The reason is mainly because of the price adjustment of Sinopec's crude is relative. As we disclosed in our annual report in 2006, we have readjusted our crude grade that Sinopec is relative to crude ever since the August last year. Sinopec's Shaanxi oilfield used to be relative to the [SIMTA] oil price. But ever since the August last year, the Sinopec sell crude is relative to the [Dooley]. So mainly because of the changes arising from the pricing correlation mechanism.

(OPERATOR INSTRUCTIONS). The next question is from Florence Tan of ICIS. Please go ahead.

(Interpreted). I have two questions. The first question is that is the Company still following up the MTO project in Dazhou of Sichuan Province?

Second is your -- do you have specific proposals or plans to develop biodiesel?

(Interpreted). With regard to the MTO project you mentioned about, currently Sinopec is still doing a preliminary period work for this project. And the MTO R&D capability is now -- of Sinopec is now under the pilot planned period. So now we are studying the feasibility of the MTO project.

With regard to the biodiesel development, Sinopec is now developing certain pilot plant scale projects in its affiliates on biodiesel. These facilities now demonstrate quite good performance. And for the step forward we would like to identify the economic viability and feasibility for these kind of fuels to replace the conventional fuels.

(Interpreted). I would like to add one more question about MTO project in Dazhou. Currently Chinese government does not allow the natural gas to be utilized in heavy chemical projects. Will this policy have any impact on your project in Dazhou?

(Interpreted). On broad base there is no such category that Chinese government limited or encourage the natural gas based chemical projects. They do have certain encouraging [laws], some certain [laws] to encourage natural gas based chemical projects. And they do have certain [laws] that does not encourage the natural gas chemical projects.

Thank you. (OPERATOR INSTRUCTIONS). There are no further questions. We have a question from [Yung Wei] of (inaudible) Securities. Please go ahead.

(Interpreted). I'd like to ask a question about special oil income levy. For the first half how much is the special income levy and what will be the figure for the 3Q?

(Interpreted). In terms of the special oil levy income CNY7.1b from the January to September.

(Interpreted). And currently the international oil price went up to a historical high. What do you think of the future price trajectory for the international oil?

(Interpreted). I'd like to first address your last question. The special oil income levy was CNY3.5b in the third quarter.

With regard to the question on international oil price, this is a hot topic under global attention. So to be honest that in September we have worked together with about 30 agencies to analyze the international oil price trend. The result as the average weighted price was about $70 in September. But just a month past, now we witnessed today it is already close to $95 a barrel. So from the supply/demand side we think that current oil price hike is supposed to be too much inflated, should be dropped to its normal level. But the current price is justified by certain other reasons such as the political, the financial and the regional factors. It's really hard for us to tell the fortune what will happen tomorrow. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). There are no further questions at this time.

Operator, thank you very much. We are now going to close this teleconference. To access the replay of the conference call, please call 852 3006 8101. The access code will be 558553. You can also listen to the webcast replay on the Company's website at www.sinopec.com, starting at 9.00 am on October 31 Hong Kong time.

Thank you again for your interest in Sinopec. Please feel free to contact either Sinopec directly or (inaudible) if you have additional questions. Good day or good night depending on where you are, everyone.

(Interpreted). Thank you for your attention. On behalf of Sinopec, I'd like to thank you all for expressions of support and concern for Sinopec.

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.