中國石化 (SNP) 2010 Q3 法說會逐字稿

Good morning everyone. Welcome to the China Petroleum and Chemical Corporation 2010 third quarter results 2010 conference call. This is the moderator of today's conference call.

Today we will have Mr Wang Xinhua, Chief Finance Officer of Sinopec Corp; and Mr Chen Ge, Secretary to the Board of Directors. After introductions on the third quarter results, the management will be ready to answer your questions. Now we will present the third quarter results first.

(interpreted) On behalf of Sinopec I'd like to express warm welcome to you to be present on today's conference call.

Now, I'd like to invite my colleagues to present the Third Quarter 2010 Results announcement.

Following the announcement we'll be very happy to take your questions.

Good morning, ladies and gentlemen. Welcome to the conference call for Sinopec's third quarter 2010 results announcement. The Chinese economy maintained rapid growth for the first three quarters with GDP up by 10.6%.

International crude price fluctuated between certain ranges (inaudible) at USD77.78 per barrel, up by 34.5% year on year.

Domestic products rise was adjusted twice as the crude price changed. Domestic onshore gas (inaudible) price was raised by the Central Government and the reform of hydrocarbon resource tax was initiated on a trial basis in Xinjiang.

Domestic demand for oil products and chemicals grew steadily. In the first three quarters, consumption of oil products and ethylene-equivalent went up by 11% and 8.3% year on year respectively.

During the period, the Company generated a good performance by leveraging the synergy, expanding market and business volume, catering to customer demand, combining closely the production, marketing and R&D, optimizing product mix.

Acquisition of Angola Block 18 was closed on September 30. Sales revenue hit RMB1.42 trillion, up by 59.8% year on year. EBIT was RMB81.9 billion, up by 11.7% year on year. Profit reached RMB56.4 billion. EPS was RMB0.651, up by 11.5% year.

We continued to improve debt structure and a lower financing cost. In May we issued RMB20 billion mid to long-term corporate bonds in China with low financing costs. By end of September shareholder equity hit RMB404.8 billion, up by 7.1% over the end of last year.

Cash from operating activities was RMB95 billion. Cash used in investing activities was RMB53.5 billion. Cash used in financing activities was RMB39.8 billion.

E&P segment optimized exploration [scheme], raised a reserve development rate, oil recovery rate, and single well output.

Sichuan to Eastern China gas transmission project achieved commercial operation, which helped to link production with marketing, thus ensuring the safe and stable gas supply. Oil and gas output hit 34.93 million tonnes and 8.87 billion cubic meters during the period, up by 1.9% and 45% year on year respectively.

We managed to stabilize and increase upstream output and thanks to the increase of oil and gas prices, EBIT of E&P segment hit RMB40.8 billion, up by 140.7% year on year.

Refining segment maintained high utilization with larger throughput, better product mix and higher output of jet fuel and chemical feedstock. Marketing of high value-added refined products was strengthened. Refining throughput in the period was up by 14.4% year on year. Oil products and the chemical feedstock output were up by 10.3% and 33.9% respectively. Light yield was further increased.

International crude price increased by a big margin (inaudible) oil product price in the period. Refining margin of the Company was RMB237.7 per tonne, down by a little bit year on year. Cash operating cost was RMB133 per tonne, down by 5% year on year. EBIT of the segment hit RMB8.49 billion.

Marketing segment continued to optimize operation structure, expand [end user] sales, and expedite new retail site expansion and announce new business development.

Domestic sales volume and the retail volume hit 104 million tonnes and 64.14 million tonnes during the period, up by 16.5% and 11.2% respectively. With an expansion of sales volume, EBIT of the segment hit RMB23.3 billion during the period, up by 4.2% year on year.

Cash operating cost was RMB167.35 per tonne, down by 2.5% year on year. Chemical segment achieved [safe] operation in new facilities in Tianjin and Zhenhai. Chemicals output was increased. We made great efforts in market development and we sold all we produced. During the period, ethylene output was 6.61 million tonnes, up by 39.4% year on year.

Synthetic resin output was 9.53 million tonnes, up by 28.7% year on year. Frustrated by the impact of European sovereign debt crisis, chemical margins dropped in the second quarter but recovered on a monthly basis in the third quarter.

During the first three quarters, EBIT of the segment reached RMB10.4 billion, down by 27% year on year. CapEx during the period was RMB55.8 billion in which E&P was RMB25.6 billion, mainly for exploration and key capacity building. Sichuan to Eastern China gas transmission project achieved a commercial operation. Refining was RMB8.8 billion, mainly for product quality upgrading, feedstock flexibility revamping, and storage and transportation facilities. Marketing was RMB13.3 billion for building and acquisition of retail sites in key areas; 1282 retail sites were added. Chemicals was RMB7.1 billion. Tianjin and Zhenhai ethylene projects were on-stream. Corporate and Others, RMB1 billion.

Thank you for your attention. Now we are ready to take your questions.

(Operator Instructions) The first question is from [David Hurd], Deutsche Bank Hong Kong.

Good morning, I was just wondering if you can confirm a simple question, confirm both the third quarter cumulative EBIT number that you reported as well as the third quarter standalone EBIT number. You seem to have a bit of a mismatch on your reports. Thank you.

(interpreted) Just now we present the third quarter results announcement from January to September. Driven by the sound economic growth in China and the growth demand in petroleum products and chemicals, Sinopec has been actively making assets in terms of the market expansion, the optimization of production, as well as product mix and management efficiency. Hence we have achieved a healthy EBIT result. (inaudible) from January to September the total EBIT achieved reached RMB81.8 billion which has been up 11.7%. For the third quarter standalone was RMB26.5 billion.

In terms of E&P, the third quarter's EBIT was RMB13.3 billion which is under the total three quarters, first three quarters, from January to September, with RMB40.8 billion which was up 140.7%.

In terms of the refining segment, the EBIT of third quarter was RMB2.8 billion and EBIT for the full three quarters RMB85 billion.

Impacted by the oil price hike, starting from last year, the fourth quarter, the domestic petroleum product price adjustment was less efficiently incremented against the oil price increase. So these have triggered our refining margins dropped and the total refining margins for the first eight months have dropped by 60.6% on a sequential basis.

In terms of the chemicals, third quarter [EBIT] was RMB2.05 billion and this also [excluding] our provision of the impairment loss for RMB920 million and total EBIT for the actual EBIT for the third quarter in chemicals was RMB3 billion if we take into consideration the provision of the impairment loss. EBIT for the three quarters in chemicals was RMB10.4 billion. Impacted by the sluggish chemical market in May and June, we have generated a loss in the previous period and the total EBIT for the first three quarters has been down by 27.3 year on year.

In marketing and distribution the EBIT in the third quarter RMB8.8 billion and first three quarters EBIT was RMB23.3 billion, up 4.2%.

Judged from our total value chain, our total EBIT increased by 11.7% year on year, which was mainly attributed to the contribution by the E&P segment, the marketing and distribution. In particular in the E&P segment, [boosted] by the oil price increase and natural gas price increase, the performance in the E&P was outstanding.

The next question is from Lawrence Lau from BOCI.

(interpreted) With BOCI we notice that your third quarter result announcement has consolidated results of the Angola Block 18 which was acquired (inaudible). Could you please elaborate more on the oil production in Angola Block 18 for the first three quarters. If you take into consideration the consolidated result of the Block 18, will the Company reach the production target for the year 2010? In addition could you please give us a number for the 2009 production volumes for Block 18?

(interpreted) The Angola project has seen the delivery and takeover has been completed by September 30 under the guidance of (inaudible) management.

According to the accounting rules, the Company has consolidated the results of the Angola project through a retrospective adjustment approach. (inaudible) noted that our first three quarters had consolidated the results of the Angola project.

The first three quarters of crude oil production from Angola project, it was 3.15 million tonnes. The income from that project was RMB12 billion. The asset size of the Company was CNY20 billion and the total profit from that project was CNY7.23 billion before tax. The profit attributed to Sinopec was CNY1.65 billion. The EPS has been increased by 2%.

The next question is from Credit Suisse (inaudible).

Hi, good morning. Thanks for your presentation, management. Can you give some guidance heading into fourth quarter in terms of for each segment what the earnings trend was likely to be especially on the back of the product price hike that happened earlier this week? Thank you.

(interpreted) Judged from the first three quarters' macroeconomic environment, and our EBIT performance, we expect the fourth quarter will be a relatively good quarter for us.

Based on expectations for the stable economic growth in the domestic market, as well as the stable growth on the product demand, we expect that the Company will make even more active efforts in terms of the market expansion, the production ramp-up, the supply issuance, the optimization of the product mix. We also will try our best to sell all we produce and strive for even better performance. Thank you.

(Operator Instructions) The next question is from Kelvin Lee.

Good morning, ladies and gentlemen. This is Kelvin, I'm calling from Tibet. My question is related to the joint venture with Kuwait Petroleum for the refinery. We heard from a consultant yesterday that the final approval from the [NDRC] is expected by end of year. Can you comment on that project, please?

(interpreted) Based on the guidance by NDRC the Company has been actively pressing ahead with the submission and approval of this project with NDRC. Currently the project is still under the review of the Government and based on our expectations all aspects of the work regarding this project are now well underway.

In accordance to the request of the NDRC during the review we will do our best to expedite the process of approval. Thank you.

The next question is from David Johnson from RBS.

The question is crude production in the first nine months was 34.93 million tonnes. Could you give us some indication what it was in the third quarter alone?

(interpreted) In the first quarter alone?

Third.

(interpreted) Third quarter, thank you.

The first three quarters crude production was 34.93 million tonnes including 3.15 million tonnes from Angola project. For the third quarter alone, including Angola project production volumes, our crude production reached 11.7 million tonnes.

The next question is from Deutsche Bank, Monica [Maher].

You just mentioned that E&P's operating income this third quarter is RMB13.3 billion but according to your first half '10 the operating income is RMB22 billion, right? Then you mention the nine months operating income is RMB40.8 billion. So how come if it's RMB13.3 billion in third quarter, how come the nine month total is RMB40.8 billion? Please clarify, thank you.

(interpreted) The figure [depreciation] is mainly attributable to the management retrospective adjustment on our performance result by consolidating the Angola project profit and EBIT. Still in the first half our results announcement the figure for EBIT does not include the EBIT from Angola project which was RMB2.2 billion. After the adjustment, our EBIT total for the three quarters EBIT has been readjusted. Likewise, we also readjusted to the first half quarter one, quarter two results.

After the readjustment on the consolidated result, the first quarter standalone's EBIT was CNY11.5 billion and second quarter CNY16 billion; third quarter CNY13.3 billion. The first half EBIT result has been also readjusted to CNY7.5 billion from CNY22 billion. Thank you.

(Operator Instructions)

The next question is from [Charles Chung] from [Hai Ton International].

Could you please elaborate the business development for your natural gas in the fourth quarter and give us some comment on your LNG project progress?

(interpreted) In the first three quarters, our natural gas production increased by 45%. This is mainly attributable to the commercial operations of our Sichuan to East China gas transmission project.

The natural gas production for the first three quarters was 8.87 billion cubic meters and this is mainly attributable to the commercial operation of (inaudible) at the end of the first quarter. After reaching our production target, the production volume has been growing very fast from March to September. In the next quarter we will carefully judge the market supply-demand equation and more directly ramp up our production volume to achieve our whole year target of 12 billion cubic meters.

Regarding the LNG project update, first of all the (inaudible) energy project has [not] been approved and currently this project is well underway. Second, the Company has signed the purchase contract with Papua New Guinea for the 20 billion tonnes of LNG (inaudible).

We'll also follow closely the market demand growth in the regions and provinces of China and we'll also try our best to track some potential projects.

The next question is from [Kim-Chong Tan] from (inaudible).

(interpreted) This is Kim-Chong Tan calling from (inaudible). I just have a question on the first quarter inventory. For the refining segment which you have booked an inventory loss in third quarter, and if you have how much? Thank you.

(interpreted) Based on the current judgment, the Company has no plans to provide for any impairment loss in (inaudible) the value of inventory.

The company will make moderating moves in accordance to the market scenario in upcoming ones. Currently the Company has no such plans. Thank you.

The next question is from Chris [Shiu] from Goldman Sachs.

(interpreted) I have two questions about Shell Gas. Currently we have noticed that the Chinese government is calling for tender bidding for the (inaudible) in the next six months. Will Sinopec be interested in that opportunity? The second question, could you give us an update about your cooperation with BP on Shell Gas?

(interpreted) The company highly values the exploration development of non-conventional resources, and thus the Company has established Eastern China company for the exploration and development of non-traditional resources.

Currently the Company is registered Shell Gas block about 42 registered Shell block. The total area is about 190,000 square kilometres.

Regarding exploration and progress of the Shell Gas development, the Company is actively pressing ahead with opportunities, and also we are busy interacting with BP potential cooperation.

In order to step up our development in non-conventional resources, Sinopec is very actively involved in the bidding process announced by the government of China in early October (inaudible) Shell Gas block opportunities. Thank you.

(Operator Instructions) The next question is from RBS, David Johnson.

Sorry, my question has been asked. I apologize.

The next question is from Deutsche Bank, Monica Maher.

Hi, I have a question about the Angola Project. So you bought it in June this year, so do you account for it for the whole year or for only the second half of the year?

(interpreted) As we acquired Block 18 Angola Project, we have made a very clear announcement on the shareholder meeting and during the process of the acquisition, that the quality and return on investment for this project are both positive.

Based on our expectation, this project after our acquisition should have increased our EPS by 1.4%. According to the actual situation, the first three quarters this project helped the Company increase our EPS by 2%.

We expect that the profitability of this project will continue to grow and debt payment will be carried out in such a manner. We believe the debt burden and debt structure will be lowered and also the profitability will continue to grow.

After the completion of this project by September, the Company has already incorporated this project into the central management of the Company.

I expect the production growth and optimization of this volume. We believe the profitability from that project will continue to grow. Thank you.

If there are no more questions (spoken in foreign language). The last question is from Hai Ton International (inaudible).

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(interpreted) First question just confirm that the purchase volumes with PNG should be correct at two million tonnes per year. Second question, recently the parent company has acquired the 40% of the Repsol Brazilian arm. There are also some market comments on the consideration a little bit highly valuated, too expensive, at USD15 per barrel. Would you please give some comments on that?

(interpreted) The project the parent company has just carried out is the Spain-based Repsol's Brazilian arm. Sinopec subscribed about 40% of this company. Currently these projects have still been pending for the approval of the Chinese government.

To make some clarification, the total consideration of USD7 billion includes both the subscription of the 40% equity of this Brazilian (inaudible) development is expensive.

Repsol in Brazil has earned 16 offshore blocks as both operators or joint venture partners.

The potential of these blocks offers positive prospects and a large volume of the resources. This move will help the Company to enhance its capability, its overseas stake. Thank you.

The last question is from BOCI Hong Kong, Lawrence Lau.

(interpreted) Could you please give a breakdown on the first quarter and second quarter's production for Angola project?

(interpreted) The total production of Angola project was 3.15 million tonnes - first quarter 1.17 million tonnes, second 1.05 million, third quarter 940,000 tonnes. Thank you.

There are currently no questions.

(interpreted) Thank you for your participation on the conference call. I will thank you for your continued support.

This is the end of today's conference call. Thank you all very much.

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.