中國石化 (SNP) 2010 Q1 法說會逐字稿

Please begin.

Welcome to today's Sinopec 2010 first quarter results conference call. This is [Tai Jing Qing], the moderator of today's conference. Today we'll have Mr Wang Xinhua, Chief Financial Officer of Sinopec Corp. After an introduction on the first quarter results, the management will be ready to answer your questions.

(interpreted) Good morning, ladies and gentlemen. Welcome to Sinopec's 2010 first quarter results announcement. China's economy in the first quarter, before the recovery, was GDP grew by 11.9%. International likewise fluctuated within a narrow range and slightly increased. [Brent] price averaged $77 per barrel, up by [70.3%] year on year.

As to the State Government policy to expand domestic consumption and improve people's livelihood, home demand for natural gas, steel products and (inaudible) grew steadily. Supported by the economic recovery in the first quarter, domestic demand for petroleum and petro chemical products kept growing. Prices of crude oil, fuel products and the chemicals rose sharply.

The company's turnover and other income grew by 92.6% year on year. The company performed much better in all the major segments except the refining segment due to insufficient implementation of domestic fuel price schemes. EBIT in the first quarter hit CNY21.5 billion, up by 28.8%. The profit was CNY15.8 billion. EPS was CNY0.182, up by 39.9%.

The company's expanding business scale and the climbing international oil price generated a bit more than other companies. However, the debt structure was improved and financing cost was lower. By the end of this March, total equity attributable to equity shareholders of the Company was CNY391.3 billion, up by 4.2% against the end of 2009.

Net cash from operating activities in the first quarter was CNY28 billion. Net cash flow used in investing activities was CNY31.4 billion. Net cash inflow from financing activities was CNY4.7 billion.

In the E&P segment, we intensified the 2D and the 3D seismic exploration activities, as well as unconventional resource development. Meanwhile, we have the recovery rate and the single well production. After overcoming blizzards, sea ice and other natural disasters, we maintained crude production stable. As to the Sichuan-to-East China Gas transmission project was put into safe and smooth operation. Natural gas output grew by 41% year on year and backup increasing oil price EBIT of E&P segment grew by 213% year on year.

In the refining segment, we maintained a high load operation in the oil refinery and further [adjusted] product mix. We increased the [yield] of live chemical feedstock to meet the demands of chemical facilities and maximised the output of asphalt, petroleum coke and LPG to produce more high value added products. A number of grass roots and a revamping of refinery projects were well underway. Crude throughput increased by 20.4% year on year, diesel production grew by 17% year on year and light chemical feedstock grew by 47% year on year.

Although refining margin in the first quarter was [dropping] year on year due to high international oil price and insufficient domestic fuel price, we further improved demand (inaudible) efficiency, cost effectiveness, scale of the business and the synergy as EBIT of refining segment reached CNY1.456 billion.

In marketing and distribution segment, we further expanded market presence with [batch] services promoting non-fuel business and [playing] out more functions within our service stations. We channelled through transportation and supplied sufficient fuel products to drought stricken areas. Total sales volume of oil products in the first quarter was CNY32.84 million, up by 24.3% year on year. EBIT of marketing and distribution segment in first quarter was CNY6.48 billion, up by 69% year on year.

In the chemicals segment, we intensified R&D, production and marketing assets in parallel, optimising production (inaudible) and production [plan] to cater for the market's demand. We maintained a high utilisation rate within our chemical facilities. Tianjin ethylene project was successfully operational. In addition, we accelerated new product development and maximised the marketable or high value added products.

As a number of new chemical facilities came [on] stream, output of major chemicals was increased by a big margin year on year. With demand and price in the first quarter both growing dramatically year on year, EBIT of chemical segment was CNY5.68 billion, up by 101%.

CAPEX in the first quarter was CNY16.844 billion, including CNY5.21 billion for E&P, CNY2.137 billion for refining, CNY5.509 billion for chemicals, CNY3.799 billion for marketing and CNY189 million for corporate and other.

That's all, thank you. Now we're happy to take your questions.

We will now begin our question and answer session. Our operator will explain to you the procedures.

Thank you. If you have a question for any of today's speakers, please press zero one on your telephone keypad and you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press zero two to cancel the question. To ensure other participants have the chance to ask questions, please try to ask only one question each time.

The first question is Gordon Kwan, Mirae Asset. Please begin.

Thank you for the very good first quarter results. Since I am allowed just one question, I have a question on the refining segment. Refining margin in the region has rebound a lot and I notice that your domestic margin has weakened in the first quarter. We heard that Sinopec will be doing the refining of chemical project in Singapore. Can you tell me the rationale of diversifying your operation to Singapore? Thank you.

(interpreted) First of all I would like to thank you all for attending Sinopec 2010 first quarter results announcement. In the third quarter, banking on the domestic economic recovery, Sinopec has made active efforts to further expand the market to keep up the management efficiency and (inaudible) the product is right. That we achieved a stable operation and production and outperforming results.

Now I would like to address your question. It is Sinopec's long term strategy to carry out international operations since the company is committed to develop into internationally competitive energy in a chemical corporation. Our international operations include the overseas activities in E&P segment, the building of the refineries and chemical plants in overseas markets and storage and logistics activities for petroleum products.

Regarding our business in Singapore, currently the company is ready to build a lubricant site based in Singapore. Currently these projects is well underway. So regarding the refining and chemical business in Singapore, currently the company is in active study and so far not yet concrete projects is put in place. Thank you.

The next question is Yin Xiaodong, [Citic Securities]. Please begin.

(interpreted) My question was about refining and the chemical segment EBIT. We noticed that in the first quarter the EBIT for the refining segment was about one-sixth of the same time last year. However the chemical segment EBIT was about five times of that performance in last year. So could you please elaborate more on the situation going on for the second quarter?

(interpreted) We noticed that in the third quarter the demand growth was robust and which also provided a boost for the demand for petro chemicals and chemical products and petroleum products. The total production volume of those volumes of petroleum products and the chemical products, increased the basic margin year on year.

The chemical segment increased by a big margin in terms of the sales volume, the sales price of the product, as well as the margins. That's why we achieved relatively good performance in this segment.

As mentioned in our presentation slides, all the major segments of the company increased by big margin except for the refining segment due to insufficient implementation of domestic fuel price scheme. The refining margin continued to decrease as was seen in the second half of 2009 when we noticed that the oil price continued to increase and the demand for fuel price scheme was not much delivered.

Looking in to the first quarter, there was no major price adjustment for domestic fuel price and we also witnessed the international oil price kept increasing and they provide a gloomy picture for the refining segment. In spite of such a gloomy picture, in the first quarter, we further made efforts to increase the business scale of the refining segment, lowering the cost base for the crude purchase cost and actively develop the heavy crude oil, refining [adaptability] with (inaudible) projects.

In the meantime, we made promotion campaigns to sell the 20% of the by-product of the refining business. That's why we have achieved a very slight good performance in refining segment.

Although we achieved a slight profit in the refining segment, the EBIT was decreased year on year. On 14 April, the [domestic] Government made adjustment on the domestic fuel price and this generated our refining segment to make certain profits or turn to back the picture.

The 14 April price adjustment, we only make sure we're enjoying about half months of adjustment or enjoy [the risk] from that adjustment for only half months so far. We notice that the oil price continues to increase, through the complex (inaudible) provides heavy pressure on our shoulders.

Looking to the future, if the oil price continues to keep increasing, we will make our active effort to approach to government and make more lobbying works to promote more efficient implementation of domestic fuel price and the adjustment for price.

Looking to the chemical segment, the sales volume as well as market share for the chemicals in the first quarter showed better performance. In the second half of this year, we expect to add more ethylene projects will come into stream and the operation of the ethylene crackers from Middle East will also join the competition. So the second half, the sales volume and the production volume for the chemicals will be increased. Then we'll face much more intensive competition from the market.

There could be more certainty generating from the chemical segment. Based on those certainties, we'll continue our active efforts to expand the market for the chemical business, advance the products [light], and promote R&D production in the market in parallel. We would also be committed to provide more marketable and high value added product to build ourself as a competitive partner in the market.

The next question is Neil Beveridge from Sanford Bernstein. Please go ahead.

Yes, good morning, this is Neil Beveridge from Sanford Bernstein. Congratulations on the results. I have a question around the Puguang gas field. I mean production for the first quarter was 1 BCM higher. That implies I think the pipeline's probably about a third full now. Can you give any guidance for the build out in gas production this year, we're likely to see the pipeline reach full capacity by the end of the year?

Also, in terms of the upstream EBIT growth, can you give any guidance in terms of the increase in upstream EBIT and how much that came from the increased gas? Thank you.

(interpreted) The Puguang project has been put into operation in the fourth quarter 2009. Now in the first quarter, witness the good production. For the [whole year] production target for Puguang, we expect to achieve four billion cubic metres. With these four billion cubic metres of production achieved by the end of this year and we believe that the E&P if it grows well, maybe increased and partly attributed to the growth from the Puguang gas field. Because Puguang gas enjoys a higher price than other natural gas prices in domestic market.

To the production target for major fields in Puguang, by 2011 we'll be expecting about eight cubic metres. So for this year with four billion operational and achieving our target, we believe the performance of the E&P will be further increased.

In the first quarter, the EBIT growth in the E&P has been increased by big margins. The crude price continued to increase by 70% and these provide impetus for our E&P EBIT growth. Natural gas currently accounts for a relatively small proportion in the E&P segment. There will be no significant impact coming from the natural gas production on our E&P segment's EBIT growth.

But that's only for the current moment. With Puguang gas continue to increase and achieve its capacity, the return on investment from Puguang will be higher than the return on investment on other natural gas fields in China. So the Puguang gas will be the major contributor to our future E&P EBIT growth. Thank you.

As a reminder, if you have a question, please press zero one on your telephone keypad now.

This next question is Horace Tse, Credit Suisse. Please begin.

Hi, this is Horace from Credit Suisse. Thank you for your presentation. I have one question on the demand situation in China. So can you tell us a little bit about the current demand in terms of oil product demand and the petro chemical demand in China in April versus the first quarter of this year?

Then just a follow up on what you've just talked about in refining. If the NDRC raises the domestic prices again in next month, given that the benchmark for crude is now about 4%, would you expect refining EBIT in second quarter to be higher than first quarter or what's the trend for second quarter compared to first quarter? Thank you.

(interpreted) In the first quarter, the economic recovery boosted the growth for the domestic demand of the petroleum product and the petro chemical products and this will also supported our production volume growth in this regard. With the GDP growth rate at 11.9% in the first quarter, the demand growth for petroleum products increased by 16.2% and that's increase for the chemical products increased by over 8%.

Demand growth in the petroleum and chemical products at domestic market also supported the production and sales volume for these kind of products within Sinopec. In the meantime, the company has made active efforts, as we mentioned, for the management efficiency, the market expansion and product (inaudible) adjustment. We have enjoyed our advantages in a business scale by the operational volume and also market presence. In the first quarter we achieved quite good performance in this regard.

Looking to the second quarter, we expect that the domestic economic development will maintain at a stable level. So the general picture will be beneficial for our production and sales volume. For the second quarter, the refining segment will also meet some uncertainty factors. These uncertainty factors may include first of all the continuously increasing international oil price. We expect some first fluctuation for the international oil price. The fluctuation for international oil price may also pose uncertainties with domestic fuel price adjustment.

So it is still premature for us to define the second quarter's result for the refining segment. Since the reform of the domestic fuel price scheme, the government has made its effort to further perfecting the current scheme. Based on our judgment with international price continuously increasing, the domestic government will study about the possibility for the perfection of the current domestic fuel price scheme and may consider another round of adjustment in this regard.

We believe the major direction for the current domestic fuel price scheme will be further implemented towards -- in a more sufficient manner. Thank you.

The next question is Andrew Chan from Daiwa. Please begin.

Hi, thank you for your presentation. I have one question on the marketing part. I notice that quarter on quarter your sales volume and I presume your margins have dropped. Can you give us the key reasons for that and outlook for Q2? Thank you.

(interpreted) The sales volume for the marketing segment increased about 20% in the first quarter.

No, I meant the quarter on quarter, it actually decreased. It dropped around 5%.

(interpreted) For the year on year comparison, the margin for the marketing segment has also increased. As you mentioned, on a sequential basis, the sales volumes and the margin has decreased. This is mainly because of the comparison with the first quarter. The first quarter we have the [vacation] and usually considered as the bleak season, not the booming season. So usually the first quarter of the year is not comparable to the last quarter of the year before.

If based on year on year comparison, we identified the marketing segment increased by the margin in terms of the sales volume, the price of the product and also the profitability. Thank you.

The next question is Grace Liu from Guotai Junan Securities. Please begin.

(interpreted) My question is about the chemical segment. The first quarter the chemical segment achieved good performance, but we notice that the chemical spread in the third quarter began to decrease. Is that true? Could you please also elaborate more about the (inaudible) situation?

(interpreted) As I mentioned, the chemical segment in the third quarter made a good start and we achieved a growth in both the sales volume and the price of the product. Looking to second quarter, we expect that Chinese economy will maintain stable growth and this will provide a boost generally for the chemical market demand and also the presence for our business in a chemical [side], especially some industrial growth is like the industrial growth in auto industry, will also provide impetus for the chemical segment.

The second half, a number of the ethylene crackers will be put into operation. So the market will have more production volume growth than before. Different competitors will join the competition, basically price competition. A general picture for the chemical segment, chemical market, will also have many uncertainties.

As for Sinopec, in spite of these uncertainties, we also take proactive measures to continue our market expansion, the [expansion] of sales network, adjustment of the products made and sharpening of our competitiveness. So although we see such a competitive market, we will keep -- try our utmost to maintain a good position in the market. Thank you.

As a reminder, if you have any questions, please press zero one on your telephone keypad now.

The next question is [Wi Katang] from Morgan Stanley.

(interpreted) Two questions, first question is about inventory for the petroleum products. How much is now the inventory level for the petroleum products within Sinopec now? Second, we notice from some domestic media reports that the refinery (inaudible) price has been increased, although the retail pricing was not increased according to the expected level. Could you please elaborate more on that?

(interpreted) In the first quarter, our total sales volume market of the petroleum products increased and we held our petroleum products inventory at a good level which can last for 16 or 18 days. So there is no big change on our inventory level.

After the price adjustment on 14 April, according to our information, the retail price is currently implemented according to expectations. However the wholesale price in some regions are still not yet fully implemented. With the international oil price keeping growing, we believe we will do our utmost to promote [all those] price levels fully implemented. Thank you.

The next question is Adrian Loh from DnB NOR. Please begin.

Hi, thank you very much. I just wanted to ask about your realised oil prices. We notice that your discount to international benchmark prices has actually reduced. Could you please explain that? Also, regarding gas prices, do you expect the Chinese government to have any reforms in this aspect? Thank you.

(interpreted) In the first quarter, the crude realisation within Sinopec's E&P segment increased by a big margin. The crude realisation for Sinopec crude increased by 107.4% year on year. Our Sinopec crude is mainly correlated with the Duri benchmark. Since the last March, the spreads between Duri and the light crude/light Brent was decreased. So the Sinopec crude correlated with Duri oil increased much sharply than the oil correlated with the light crude/light Brent.

The first quarter of the natural gas increased by 4.7% in the first quarter in terms of the realisation price; the major natural gas realisation was driven by the Puguang gas operation because Puguang gas enjoys a higher price level than other natural gas in China.

The state government made a long term study on the potential reform for natural gas pricing. The major purpose of the natural gas reform by the government is to establish a correlation between the -- a correlation of the price between the natural gas and alterative energy. So with the fluctuation of the alternative energy price, the adjustment will be made on the natural gas price.

The natural gas price reform is projected to reflect the scarcity of the resources products in the market and the dynamics of the market demand and supply. The government will make [a state-wise] manner to promote the natural gas price reform and based on the level of the economic development and affordability of the public. The timing and the level of the price are still not yet defined by the government. Thank you.

As a reminder, if you have any questions, please press zero one on your telephone keypad now. There are currently no questions.

Thank you operator. As there is no more questions, we will conclude this conference call. Thank you all for your participation on Sinopec Q1 earnings call.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.