中國石化 (SNP) 2012 Q3 法說會逐字稿

Welcome to the China Petroleum & Chemical Corporation 2012 third quarter results conference call. Today we have Huang Wensheng, Secretary of the Board and Mr Zheng Baomin, Director of Investor Relation department. After an introduction third quarter results, our management will be ready to answer your question. Now we will present the Q3 results first.

Good morning. My name is Huang Wensheng. I'm very happy to have this opportunity to update you on the third quarter results. Today we have several management people from the different business units, including our production, coordination and corporate finance as well as people from the business units. I might suggest to have [Dr. Chan] to quickly go through this presentation slides in English and then followed by the Q&A section. Dr. Chan please.

Thank you Mr. Huang. Good morning, ladies and gentleman. Let's start the presentation from slide number 3. In the first nine months of 2012, China's GDP grew by 7.7%. The domestic demand for oil products and chemical products continued to rise, though at a slower rate. In keeping with the international cost price, the government timely adapted the refined oil price, three times down and four times up. The prices of chemical products fell in the second quarter, but rebounded in the third quarter.

Slide number 4, in the first nine months of 2012, the Company's revenue and other income up by 8%. Operating profit was RMB68.3 billion, down by 22% year-on-year, mainly because chemical segment suffered loss, due to economic slowdown. The net profit for the first nine months was RMB42.8 billion. Base EPS was therefore RMB0.493.

For slide number 5, in the first nine months of 2012, the net cash generated from operating activities was RMB73.3 billion. The net cash used in investing activities was RMB96.5 billion. The net cash generated from financing activities was RMB12.7 billion. As of September 30th, total equity attributable to shareholders of the Company was RMB489.7 billion, up 3.7% compared to the end of last year.

Slide number 6. In the first nine months of 2012, the Company's focus on achieving growth in reserves and production of oil as well as enhancing exploration in key areas. Significant progress has been made in field exploration, including (inaudible). We have strengthened and refined the development and management in major oil fields, accelerated growth in mass production of oil and gas, promoted the exploration and development of unconventional oil and gas and started to build the production capacity of (inaudible) project. In the first nine months, oil and gas production reached 318 million BOE, up by 4.9% year-on-year, of which crude oil production was 245 million barrels and natural gas production was 438 bcf, representing a year-on-year growth of 2.3% and 14.7% respectively. Operating profit of (inaudible) maintained as stable compared to the same period last year.

Slide number 7. In the first nine months of 2012, the Company made efforts to optimize crude procurement and allocation. We adapt the refining oil (inaudible) upgrade steel quality and advance the product mix to increase the output of (inaudible). We have also streamlined operations to reduce cost. In the first nine months, refining throughput were 4.4 million barrels per day, up by 0.5% year-on-year. In the first nine months of 2012, refining losses were RMB15.5 billion, a significantly reduced loss compared to the same period last year. Along with timely adoption of oil (inaudible) price by the government and the two price hikes in August and September, refinery margin of the quarter improved significantly.

Slide number 8. In the first nine months of 2012, the Company adopted the operation strategies in response to market trend and demand, maintained a good balance of oil production resource and optimized sales structure to increase retail volumes. We (inaudible) our non (inaudible) business and e-commerce business and we see the alternatives to further explore the market of networks for transportation. In the first nine months, the total sales volume was 128 million tonnes and domestic retail volumes were 81 million tonnes, representing a year-on-year growth of 5.6% and 7.3%, respectively.

Slide number 9. In the first nine months of 2012, we made effort to increase total sales volume and improve our sales structure. Operating profit of marketing segment was RMB30.2 billion.

Slide number 10. In light of the market situation, we have actually lowered the operational utilization of our chemical facilities, maintained a safe and stable operation (inaudible) raised the major economy and technical indicators, optimized an adaptive restructure of (inaudible) and chemical products. We have increased the output of high-valued-added and differentiated products to enhance productivity. In the first nine months, the output of ethylene was about 7.02 million tonnes, down by 4.5% year-on-year and the output of synthetic resin was 9.96 million tonnes, down by 1.1% year-on-year.

Slide number 11. In the first nine months of 2012, chemicals market entered fierce competition and saw a sharp drop in chemicals prices. Chemicals margin dropped sharply and the chemical segment suffered an operating loss RMB0.3 billion. The stabilization and the recovery of the chemicals margin has appeared since July this year.

For CapEx, slide number 12. The Company's CapEx for the first nine months reached RMB83.4 billion, of which RMB35 billion E&P, RMB16.8 billion refining, RMB10.5 billion in chemicals, RMB20.3 billion in marketing and RMB0.8 billion in corporate and others. That's all. Thank you again and we are pleased to answer your questions.

(Operator Instructions) After you are announced, please ask your question. (Operator Instructions). To ensure all the participants have a chance to ask a question, please try to ask only one question each time.

The first question is from James Hubbard from Macquarie. Please go ahead.

Morning. Thank you very much for the conference call. Just one question. Refining and chemicals seems to have been a bit stronger than expected in Q3. Could you tell me, how are you seeing both of those segments margins and utilizations in Q4 so far? We've had one month -- should be expect margins and utilizations and refining and chemicals to be churning up from Q3 levels or weakening from Q3 levels.

The refining did better in Q3 comparing with Q2, in consolidating with write back of the losses -- the [provisioning] in the Q2 and we delivered the RMB3 billion in third quarter. But without this write back, we start to make money in September. For the chemical business, we have seen the price of the chemical products have been up again and still we have a challenge with a higher cost of the (inaudible). But the margin did improve a lot. For the refining side, the utilization rate is pretty high. It's around some 94% to 95% and the chemical, we're still running at 95%. We expect, based on the current cost of crude on the price of the products, we believe that the margin at the refinery be improved, further improved, in comparing with September.

Okay. Thank you. I'm sorry. Could you just give a little bit more color about that write back you mentioned in refining? What is the write back and how much was it?

I mean, the first half in (inaudible) the cost of our products on the way we took some RMB6 trillion separations on the -- given the third quarter with the height of our product price of the -- those provision have been write back.

Okay. Thank you.

Thank you.

The next question is Lawrence Lau from BOCI.

(spoken in foreign language).

Yes. I will answer your second question. That is, you're right. We are write back some RMB6 billion of the provision we took in the first half and for the lifting cost in third quarter, I would like to have Baomin to give you this answer.

The lifting cost in the third quarter was slightly increased. Actually, in the first nine months, our lifting cost was $16.4 per barrel.

Thank you.

Thank you.

Your next question is Scott Darling from Barclays. Please go ahead.

Hi. Good morning, everyone. There's been a number of comments about further roll out of natural gas reform to other provinces. Not Guangdong, Guangxi. Can you make any comment around that and maybe give us all an understanding of some of your developments on a tight gas and conventional projects, as we go into next year? Thank you.

We have the prime development of unconventional gas in China, including the [pat] gas as well as the shale gas, the coal bed methane. It was also gas (inaudible) unconventional. In (inaudible) gas side, we have capacity in Inner Mongolia and we have project and we expect it to go downstream in the year 2015 with a capacity of 6 billion cubic meters.

For the shale gas, we have ambitious plans. However, we're still developing an initial -- developing in the Sichuan area and we have a pilot plan there and we expect we can deliver some 500 million cubic meters of the shale gas, in next year. It could be further be expanded to the 2 billion cubic meters but it's still up to the final optimization of the production based on the pilot plan we are doing now.

The coal bed mapping, we are developing that -- such activities, but that is not a significant part. For the natural gas pricing, it has been testing in Guangdong and Guangxi, though we are now starting the outcome of this testing activities, but we have yet to receive any further information from the NDRC in this regard. Thank you.

The next question is Neil Beveridge from [Neuberg] and Berstein. Please go ahead.

Yes. Thanks very much for the conference call this morning. Just a quick question on back to refining margins again. Your crude realization seems very low for Q3. I think about $90 a barrel. Can you just confirm again what benchmark you're using for the pricing crude and whether or not you think the abnormal realization in 3Q will revert to more normal average in 4Q. Thank you.

Thank you. I would like Baomin to give you an answer.

In the -- actually, we do not have a benchmark for -- to calculate our refining markets. Actually, we use our actual imported crude. Our product import actually have lots of sources. We buy globally. I think the best, say, reference is the crude import cost announced by the customs every month, so actually these, in September, this import was $108 per barrel announced by the NDRC. In July and August, it was $100 -- $99, close to $100 a barrel.

Thank you Baomin. Thank you.

The next question is Laban Yu from Jefferies.

(spoken in a foreign language)

(spoken in a foreign language) The head of corporate finance will give you answers. I will just make an interpretation of what they said.

(interpreted) It's actually the major reason for the decline in our revenue is because of the -- realized the price -- we have a benchmark, because our realized price has a one-month delay compared with international benchmarks. So in that pricing period, that is from June to August, compared with the previous period from March to May, our realized price dropped 14%. At the same time, international benchmark dropped 13%, so it's relatively similar. The production in the two quarters was flat, so the major reason was the realized price. Thank you.

The question was why is the upstream revenue have been declining in the third quarter. Thank you.

Thank you.

The next question is David Hurd from Deutsche Bank. Please go ahead.

Hi Baomin, it's David Hurd from Deutsche Bank. Just a follow up on effectively your average sales price. I understand the one month lag. Are you still used Fateh for third quarter, when you look at the E&P division?

We -- our benchmark is our Dubai price.

Yes. That's Fateh. Are you using something other than Fateh out of Dubai. Fateh for the third quarter was about $100. Your average sales price for the third quarter is about $95, as far as I can tell. More or less. So I was just trying to figure out what exactly the ASP that you're using, what crude are you using?

We have a discount on top of the-- Dubai.

Right, a discount.

The discount is the same, compared to the second quarter.

All right. The discount is a Sinopec discount.

Yes. Yes, it's in on the transportation, insurance and everything.

All that sort of cost. Yes. Okay. The other, if I could, I just -- I wanted to follow up the provision that a couple of people asked about earlier. Could you explain to me what -- or I should say the write back in the third quarter, the provision in the first half. Why did you take a provision in the first half '12 on the refining side for RMB6 billion?

Yes, that is a good question. I will have the Mr (inaudible) our head of our corporate finance to give you the answer.

Thanks very much.

(interpreted) Okay. The provisions made are because our testing on our inventory cost and also realizable price, so in March, crude oil price reached the peak, and then declined sharply in May and June. June was actually was the bottom. At that time, we have some high cost inventories. Also, in the domestic product price was also the lowest in June, so based on the realizable product price and we made provision on our high cost inventories. Either after July, crude oil price recovered and also in August and September, the government raised product price and by end of September, our findings start to make small profit, so based on this was a product price and the inventory cost, we made write off of the provisions we made in end of June, which was RMB6.5 billion.

Thank you.

Baomin, it sounds like you're provisioning for an inventory gain or loss. Is that correct?

Yes. Generally, not in that way, but it sounds like that, because when we announce our results, we have to evaluate the cost of our inventory and given the cost of the inventory at the end of June is so high, but the products price has been lower, given -- under those the inventory is obviously -- if we (inaudible) inventory in the products we may suffer loss and based on the gaps, under the -- we took the provision. With twice the hike in August and September, and those inventory may no longer be a loss under the -- it could be a gain. Actually it's helping the cost of over refining.

Right. So you're just moving profitability from first half into third quarter?

(multiple speakers)

You can just think of it in this way that after we make the provision at end of June, because at that time, we do not know where will be the crude price change. We do not whether they are to increase or decrease, so after the making the provision, so in June, if we process the inventories, we can break even in the refining for July and then in August and September, we make a small profit. You can also see it in this way. Thank you.

Thanks very much.

(Operator Instructions) The next question is Simon Powell from CLSA. Please go ahead.

Yes, good morning. Thank you very much for the conference call. My question relates to the chemicals business. You hinted at a rebound in chemical ASPs in China. Could it be argued that the rebound in prices was potentially as a result of some quite significant shutdown of capacity in your business? As that capacity comes back online, is this stabilization of prices sustainable into the fourth quarter?

For the chemical business, it is an international business; there are no barriers. It's really something related with international price. We have seen the price in some hydrocarbons derivatives have been improved a bit, including the aromatics, as well as including the (inaudible) and the propylene derivatives. But we are still very cautious on the ethylene derivatives, given we have seen a lot of the low cost of production from the Middle East and from the US. They seemingly enjoy a better lower cost.

So we are not shutting down our facilities. We have some of the regular shut down for [Manhanus] and take a big longer with Manhanus to control this, but that is not a significant part. Our chemical facilities still operate out to some 95% utilization rate; it is still very high. Thank you.

The next question is Nikita Zhang from China Life Franklin Asset Management.

(spoken in foreign language)

The financials or the provision or the write back based on the cost of the crude, they realize the products price. So it's not regularly, it's based on the dynamic of the price of the crude and their price of products in China. So I'm not in a position to give you how much we are going to pay. This really depends on how much a price -- pump price will be. So we do not take it quite regularly, but it's really up to the market and I'm not in a position to give you this.

For the refining margin, today we can make money and that is beyond whole US dollar per barrel and given it's based on the consolidation of overall business and I do not have the precise number at the moment to give you, but it is better than the third quarter based on the cost of crude on the price of the products. Thank you.

(spoken in foreign language)

(spoken in foreign language)

The next question is [Andrew Chan].

Hi, thank you management and just two questions, the first one is, so without the inventory provision, it is safe to assume that your refining was loss making in third quarter. That's the first question. Second question is I noticed your marketing sales volume was up 11% quarter on quarter, but your EBIT was flat, so there might have been some margin squeeze there. Can you elaborate a little bit? Thanks.

Okay. I will take your first question and Baomin you take the second one. Yes, without those write backs, we still suffered loss in the third quarter in terms of refining side given we suffered a severe loss in July in the refining. Eventually in August we improved and we made a profit in the September.

The second question.

The second question on the marketing operating profit flat quarter on quarter, but will have a [more than] increase. You are right, there are some -- because the refining is making a profit, so we may have some pressure on the marketing. Also, this year the demand for oil product is quite weak, especially in the diesel product. Gasoline actually we will still see quite a strong growth, but diesel, it was only flat year on year, so that also has some pressure on the marketing margins. So this finals mainly differentials or the marketing spread was a little bit lower quarter on quarter. Thank you.

Thanks. Also, is it safe to say that you offered more discounts in order to increase sales?

Yes.

Not for the pounds side, not for the gasoline, but for the diesel.

Okay.

The gasoline (inaudible) is quite strong in this driving season for the national long holiday. So the demand in gasoline was very strong, but poor demand in the downstream side and that put pressure on the margin of the diesel. Thank you.

The next question is Simon Powell from CLSA. Please go ahead.

Thank you for taking another question from me and I'm sorry to keep coming back to this, but the realized crude price on our numbers for the third quarter is actually $90, so a substantial discount to the buyer and I know you've given an answer on that, but my key question also says that natural gas ASPs in the third quarter were down quite considerably relative to the second quarter at about RMB5.48 versus RMB6.19 in 2Q on an RMB cubic meter basis. Can you shed some light on why natural gas prices would have actually gone down slightly in the third quarter?

Yes and Mr. Zheng, the head of corporate finance will take your questions in terms of the natural gas price come down.

(interpreted) The realized price for natural gas because the Government did not change the gas price, it was only because the end users, they're all consumed by our end users are different for different types of customers, for example, if the industrial users consumption increase or the residential use increase. So this fluctuation, we have some seasonality. We reckon only a 2.4% change in the realized price for natural gas, so we do not think that it is significant. Thank you.

The next question is David Hurd from Deutsche Bank. Please go ahead.

Baomin, just quickly on your CapEx, it looks like you've spent about 48% of which you're looking to spend for the full year. So your guidance is about RMB172 billion and you've only spent RMB83 billion. Is your guidance for 2012 a little bit high?

This is normal for our CapEx spending, because we always have a relatively low CapEx in the first three quarters. In the last quarter we will catch up the full year's total CapEx climb. Also considering the macro economies in China and also globally, we are reviewing our total CapEx for this year. We may have some slight adjustment, but we don't think that to be a big move. For all the strategic projects which have already been started, we will carry it on. For some minor projects where this has not been started, we may postpone that project, but we don't think that will be a big change. So generally speaking, in the fourth quarter, in the last quarter we will catch up. That is the normal practice. Thank you.

(Operator instructions) There are currently no questions. Chairman, do you have any closing comments?

Thank you very much for participating in this conference call. Should any further questions you may have, just call our IR people in Beijing or in Hong Kong. Have nice day. Thank you.

Thank you.

This is the end of our conference call, thank you for all attending Sinopec's 2012 Q3 earnings conference call.