中國石化 (SNP) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen. This is Timothy [Ju] of P.R. China. Welcome, everyone, to Sinopec Corp's earning conference call for the first three quarters of 2018. Please be reminded that the results presentation can be downloaded at www.sinopec.com. (Operator Instructions)

Without further ado, I would like to transfer the call to Mr. Zheng Baomin representative on security matters for Sinopec Corp. Mr. Zheng, you may begin.

Thank you. Ladies and gentlemen, welcome to Sinopec's third-quarter results announcement conference call. Present in Beijing is Mr. Huang Wensheng, Vice President and Secretary to the Board of Directors; Mr. [Wang Dehua], Deputy Director General of Corporate Finance Department;; Mr. Ma Yongsheng, deputy head of the operation and production department; and also Dr. Chen Yang, director of investor relations department.

So first I would like to invite Dr. Chen Yang to go through with you the presentation.

Thank you, Mr. Zheng. Good morning, ladies and gentlemen. Welcome to our third-quarter conference call. Before we start, let me highlight the cautionary statement.

In the first three quarters, China's GDP grew by 6.7% year on year. International crude price continued to climb up with fluctuations. Domestic consumption of oil price and chemicals kept growing. Apparent consumption for oil products was up by 5.4%, among which gasoline up by 6.4%, kerosene increased by 9.2%, and diesel increased by 3.7%. Domestic chemicals demand kept revenue growth with ethylene equivalent consumption grew by 7.8%.

In the first three quarters, the Company delivered a solid result. Turnover and other operating revenue grew by 18.8% year on year; EBIT was RMB97.6 billion, up by 44%. Profit attributable to active shareholders was RMB60.2 billion. EPS was RMB0.497, up by 52.7%.

We kept (inaudible) scale and moderately increased debt with low interest. By the end of September this year, the Company liability to assets ratio was 48.2%. Our financial position was solid. At the end of the reporting period, net assets were RMB721.3 billion.

Our cash flow was strong. Net cash generated from operating activities was RMB138 billion. Net cash generated from investing activities was RMB3.2 billion. Net cash used in financing activities was RMB75.9 billion. Free cash flow continued to grow. Cash and cash equivalents was RMB228.9 billion, providing abundant support for our strategic development.

In E&P segment, the Company gave a priority for high-efficiency exploration and made new discoveries in Tarim Basin and Ordos Basin as well as Sichuan Basin. In development, we adopted a profit-oriented approach, adjusting development activities and resuming profit oil production.

We also accelerated natural gas development by enhancing production supply/storage/marketing system, building to realize a synergy along the entire value chain. In the first three quarters, domestic crude production kept flat. Natural gas production continues to grow.

Our realized crude price averaged USD65.12 per barrel, up by 38%. Realized gas price averaged USD5.9 per Mcf, up by 13%. Lifting cost was USD17.14 per barrel. EBIT of E&P segment made a turnaround in the first nine months.

In refining, the Company proactively adopted a product structure, improved production volume of gasoline, jet fuel, and other high value-added products. The diesel to gasoline ratio further decreased to 1.06. At the same time, we actively implemented refined oil products quality upgrading, kept high utilization rate.

We also strengthened our marketing and the services of refinery byproducts with LPG, asphalt, and sulfur, realized good profit. Refinery throughput grew by 3% and the refined oil products production grew by 3.5%. Among which, gasoline up by 7%, kerosene up by 9% over the same period of last year.

In the first three quarters, refining margin realized USD10.96 per barrel, up by 13.7%. Cash operating cost was USD3.56 per barrel. EBIT of refining segment totaled RMB55.3 billion, increased by 24.5%.

In marketing, the Company brought our advantages in integrated operation and the distribution network into full play, actively responded to domestic oversupply and the fierce competition, coordinated resources, expanded domestic sales volume. We improved marketing network, optimized service station and pipeline layout, and added more service stations and C stores.

In the first three quarters, total domestic sales volume and the retail volumes kept growth. Annualized average throughput per station was 3,953 tonnes, increased 0.5% over the same period last year. In the first quarter, the EBIT of marketing and the distribution segment was RMB25.7 billion. Our nonfuel business kept increasing rapidly. The revenue and profit of nonfuel business was up by 13.4% and 42.9%, respectively.

In chemicals, the Company optimized feedstock mix to reduce cost. We further optimized product slate, produced customer-oriented and high value-added products. We intensified efforts on R&D production and promotion of high-end new products. We coordinated our resources, adopted precision marketing, and further expanded market share.

In the first three quarters, ethylene production reached 8.8 million tonnes, up by 2.9%. Synthetic resin production increased by 3.2% and total chemical sales volume grew by 12.8% over the same period last year. By consistently optimizing the structure of feedstock products and facilities, our strong chemical gross margin was kept. Chemical segment EBIT was RMB28.7 billion, up by 23% year on year.

For CapEx, the Company focused on development quality and efficiency. The CapEx for the first three quarters was RMB48 billion. CapEx for E&P was mainly for oil and gas capacity building and construction of gas storage and pipelines.

In refining, we focused on construction of regional refining centers, product mix adjustment, and quality upgrading projects. CapEx for marketing was mainly for construction of refined oil products pipelines and service stations and the revamping of underground oil tanks. CapEx for chemicals was mainly for Zhongke and Gulei projects and feedstock and product optimization products as well as core chemical products.

That's all for the presentation. Now the management are pleased to take your questions. Thank you.

(Operator Instructions) Larry Liou, JPMorgan.

(spoken in Chinese) Good morning, management. This is Larry Liou from JPMorgan. Congratulations on the strong performance for Q3. I have four questions.

The first is regarding E&P segment. From operating profit perspective is still lossmaking. I just want to know how big the losses from imported LNG business. And despite the LNG impact, what's the performance of domestic oil and gas production business?

The second question is regarding to the refining segment. Despite the inventory gain and losses impact, the fundamental performance is quite solid. What is the outlook for Q4?

The third question is for marketing business, stable performance on both oil and nonfuel side. What is the outlook for the Q4? Last question is regarding the chemical segment. Strong performance, but can management give more colors on the main drivers for the strong performance? Thank you.

Thank you, Mr. Liou, for the questions that covered all the value chain up from the upstream oil and the gas production down to our chemical business. For the upstreams, all those areas have been covered by Dr. Chen.

I would just touch on your questions about the LNG loss in the business in the third quarter that we reported almost RMB2 billion. If you took that out of that, that would be -- for the oil and the gas production, that would be profitable.

For the refining side, we report a certain amount of the inventory, but not significantly. But because it is [based] in the third quarter, the crude price, if you look at the aggregate [r rate] and look at it, actually the day one of the third quarter to the end of the third quarter, it's almost flat.

So we do not have the significant inventory gain in the third quarter. But because the second quarter, we already reported quite high inventory gain, about some RMB5 billion and the third quarter is about RMB2 billion.

For the marketing area, you are absolutely right. You can see the momentum of the nonfuel side. We continue to believe this momentum can kept in the fourth quarter, even the upcoming several years. But in the fuel side, we face a challenge, not only from those (inaudible) refineries, but a lot of the local refineries that still have some circumstances.

They sell at a lower price, given the Chinese transition in the governing policy. As we all say, in the transition of the European 4, European 5, European 6 equivalent of the products. And the same time in some places trying also to introduce ethanol fuels and in that area bring some additional margin for the retail side and to solve the small retail [outlights] they may sell at the discount. So there, we continue to see the competition from the marketing in the fuel area.

For the chemical side, we, through thanks to the economic growth and the quite strong demand growth in the whole year, we delivered very positive earnings growth. And we continue to believe this momentum can be kept, given that the demand is still very strong. In the first half, we reported more than 10% in year-on-year growth and the whole year is a high-single-digit demand growth.

And in the next two years, we can continue to see this momentum. For, if you look at different product slates, we see that plastics has realized organic chemicals contribute a significant of the earnings. So that is your answer. Thank you for your questions.

Andy Meng, Morgan Stanley.

Good morning. I have two questions. So first question is regarding our E&P business. You mentioned about the NG loss and excluding that, E&P will be profit making.

So if we actually look at the oil price change, we think E&P, our calculation probably would have much higher earnings. And I think quite a lot of investors share the same view. So could you elaborate a little bit more why the E&P earnings is not increasing, as the oil price increase suggested?

The second question regarding the CapEx. So I think if we look at the first three quarters, the CapEx spending versus the full year, we still have a lot of room to increase. Would that really happen in fourth quarter? And for the full year of the CapEx, do we expect we will beat our budget or we will be below our budget?

And considering this government's push regarding spending more on this like E&P side, boosting oil production, will our Company considering higher CapEx in the future to boost the E&P either oil or gas production? Thank you.

Thank you, Andy. I would like to take your second question first and leave the first question to our Mr. [Zheng], who is the deputy director general of our upstream -- of our corporate finance.

For the CapEx area, we have beat the overall RMB117 billion the whole year. And for the CapEx for the upstream side, in this year we expect some RMB48.5 billion, budgeting under. We are pretty much in line.

And even at such a continued promotional option business, we continue to stay in line with our CapEx, given at the very beginning of this year we have fully committed. Not only in this development area, but we also are committed fully in the exploration area and we do not have any change in this regard.

And we are now making the next year's budgeting. And we are based on our expected crude and we will continue our efforts to make more investment in the upstream side.

So thank you, Andy. And I will let this toward Mr. [Sung] to give you a detailed explanation of our upstream. Why the crude price have been rise, but our earnings keep flat.

(interpreted) For this year, because the oil price increased, our upstream a profit become better. In the first three quarters at the LNG segment has been a loss of RMB1.08 billion loss. And the LNG loss is around RMB4 billion, is all loss in the upstream is RMB1.08 billion.

If we don't have the loss of LNG segment, then the upstream will gain around RMB3 billion profit and the cost of crude oil will be high. And our -- now the US crude oil price is around $66 per barrel. And so the profit comes from the natural gas in the upstream.

If we take all the years hold, we have a strict control of the cost of oil and gas. And as the crude oil price increase, we are sure this year's profit in upstream will be better than last year. Thank you.

Leo at JPMorgan.

Yes, thank you for taking my question. I have two questions. One is in terms of the opening up of the chemical sector to foreign companies in China, what is Sinopec's expectation and plan, I guess, for the trend?

And secondly, in terms of your expectation for the gas price in the winter, but you will be able to enjoy higher gas price if there is more demand during the wintertime. Thank you.

Thank you for your questions. I would like to take your first question and I will leave the second question to Mr. Sung for the gas price issues.

For the open up of the chemicals have been happened for more than two decades. So the demand for the chemicals in China have been supplied not by the domestic China producer, but also supplied by the international players.

Today, China imports more than 40% of the chemical downstream products from the international markets. So I believe the government will continue its efforts to open up to the outside the competition in the chemical situation still be there. But the China demand obviously very strong. And sometime the China demand have been from -- in the past two decades ago was whether we can be supplied the days have been -- whether we can be supplied at a better quality and better services.

So we are now only not only a supplier of commodity today, we try to produce lots of the specialties or tailor-made of some product to our customers. Take the plastic as an example. We have more than 64% of the chemical plastic have been, what we say, the performance compounding that is tailor-made to meet our unique need of the customers.

Take another example of the chemical fibers. More than 90% of the chemical fiber products have been tailor-made to our customers. We make even more commitment to our customers to meet their specific needs. And this helps us a lot to deliver this good result in the last year and this year. We expect this effort can also help the Company to be more sustainable in the years to come.

I would like to turn it over to Mr. [Sung] to give you the other question on the second, gas price issue.

(interpreted) According to this year's demand and the supply condition, which is much better to the natural gas price, by the end of this quarter our realized natural gas price is around $6 per [thousand] cubic meter.

And this year is different from last year because of in the second and third state and which is the low demand for the natural gas consumption. But this year is different, which is much better than last year.

And we see development of natural gas production, supply, storage, and sales systems building. And also the price of individuals and not individuals of natural gas being paired together. And the natural gas oil price has been gradually increasing.

And our Company's profit on natural gas is much better than last year. By the end of the third quarter and the overall earnings is around RMB3 billion and we think the whole year's earnings will be around RMB4 billion, which is much better than last year. Thank you.

(Operator Instructions) Johnson Wan, Deutsche Bank.

Thank you, management, for the 3Q results explanation and discussion. I have two questions. First question is should we be worried about the Iran sanctions, which are obviously coming up in the next few days? Obviously, Sinopec is the biggest buyer of crude in the world, including Iranian crude.

I know in the past we have received quotas from the US government. But this time around, given the tensions between US and Chinese government, will we be able to receive those exemption quotas again? And if not, is there an alternative to replace the Iranian crude elsewhere, given that that global capacity even within the OPEC countries are quite tight at the moment? So that is my first question.

Second question is just a quick question I guess on the marketing segment. I see the marketing segment in 3Q being quite weak versus 2Q. Is that a result of just higher teapot refinery run rates and that has as a result increased the competition in the marketing segment? Thank you.

Your first question is a bit of political sensitivities and I would like to take this question. We have been explained during our first-half results announcement. You are absolutely right that Sinopec is the largest refinery in the world. By the end of last year, our capacity was around some 239 million metric tonnes per annum and we imported more than 85% of crude from the international market.

And from the crude imports, we have a [tendency] of our policies for the various surprises that the international supplies for considering based on the commercial terms as well as the international common practice. And our crude imports were based on the [species] and based on the all the country regions, the crude price, the freight, the tariffs, etc., etc.

And we have existing contract with a supplier from national Iran oil companies and we have been exercising this contract for more than two decades. And we have disclosed this information on our 20-F reports; that is the US-Sino reports.

And some of our refineries was designed under the confederation was designed based on the national Iran crude that have a characteristic, have a higher aromatics content, which have a great help for our downstream production for the [paraxylene] as well as for the aromatics other derivatives. This is going to be help for our refining profitabilities.

And we take the same position with you. We attach great importance on the progress of this tension in national Iran. We are now approaching the talking with relevant government authorities as well as talking with suppliers and they're trying hard to mitigate the potential risks that may come in the upcoming weeks.

But we will -- at the same time, we are trying hard to find more channels to supply our refinings. We have our outlier Unipec, that is our trading firm. Every year they trade more that 300 million metric tonnes of crude. Among those trading, 60% of the crude have been imports. We still have a lot of room to accommodate these issues. Thank you.

For your second question from the marketing weakness, we do not see significant weakness in the demand side. In first three quarters, the demand of oil products was some 5.4%. In the gasoline and the jet fuel in particular, the demand was so strong and we are working very hard to manage our refining and operate at very high utilization rates. At the same time, we also see some of our local refineries, they have their quotas.

Given our marketing business, we have a [ladder] of the market sales volume. In China every year we sell more than 170 million metric tonnes of our products, gasoline, diesel, and jet fuel in China. And our refining only can meet some 75% of the system markets needs.

So we do not see the significant threat from the teapot refineries. But we have -- not only a threat, but we have a lot of cooperations. We also are seeing our products from their operation. We even work with them to help them to operate their refineries to produce inspect of the products.

So from long run, we believe the economic growth in China can keep its momentum. And our product demand continues to be very strong in the gasoline and jet fuel in particular. And we optimize of our products means to meet these needs. And today, our yield of the gasoline have grown significantly and reveals the yield of it. The diesel side, this also be very helpful our refinery.

So in the past two to three years, we have been facing the competition with the local refineries, and the same time through this competition, we have been approved. The refining capacity need is based on the large scale, based on the technology innovation, based on the good logistics, based on bill management, and based on the integrated operations. Not only refining, but the marketing area as well as based on the excellency operations.

We make the record high of the earnings in the refining area, even at this is a severe market situation. And we are continue to deliver the sound performance in the refining side. Thank you very much.

Can I have a follow-up question just on the first question? So can I just confirm with you that in November, Sinopec has already ceased purchasing Iranian crude?

We have our -- with import supply and we adjust it based on monthly basis. And our considerations have accommodated different types of crude. The price have been excluded. And if you look at the imports volume, those vessels from elsewhere will be coming in 1.5 months. So you can check the volume based on Reuters, based on the public information. Thank you.

Peter at DBS (sic, UBS).

Good morning. It's Peter at UBS. Thanks for the presentation and congratulations on the results. I just have two questions, please. First of all, just looking at the corporate others and elimination categories of the operating profit, it looks like the earnings growth was held back just a little bit by the growing losses in those categories.

And for this year, the levels of loss look a little bit high when compared to historic levels. I just wanted to ask if we can understand what is driving those losses to get incrementally worse and whether we should think of those levels as being recurring or not.

The second question -- I may have missed this earlier in the presentation and I apologize if so. But just wanted to ask what caused the 11% rise in the marketing cash operating cost this year. Thank you.

Thank you for your questions. I would like to hand it over to Mr. Zheng Baomin to take your questions.

Okay. Hi, Peter. For the changes in corporate and others, it's mainly because of the Unipec, the trading company. Last year it made very good performance; however, this year it was flat. And corporate others, normally it's a spending segment. So without the earnings from Unipec, it's a loss. So year on year's beating, we have a difference of more than RMB60 billion. So this is mainly because of Unipec earnings change.

And for the cost of the marketing segment, this is mainly because that we enhanced our retail sales and to face the stronger competition from the third-party gas stations. So the retail part takes a bit more cost in the logistics and also the operators. This increase is mainly due to our effort in expanding our retail volume. Thank you.

[Tian Chen], HSBC.

So thank you very much for the call. I just one question. On the fuel oil production, we talking about this IMO 2020. There is some of our refinery have been working with the shipping companies. So I just want to say, on a higher level, how are you prepared? So what kind of the solutions?

And based on what kind of tax, say China's export tax [on sure]. If the tax for the fuel oil production or export unchanged, do we -- actually, are we still profitable to use the fuel oil to make the low sulfur fuel? Or otherwise, what would be the solutions?

Thank you for the questions. It sounds like a tremendous opportunities for our refinings for this IMO 2020, given it brings a lot of the demand growth for those low sulfur compounds. This fuel oil we have been preparing and welcoming this IMO 2020.

And in China, even ahead the IMO 2020 in some places. In Yangtze River, as an example, it will be implemented in the year 2019. So one year ahead of that.

So we are the largest refinery in the world. And our refining, we have enjoy good locations. Some of them are located in the coastal area, where we can receive the international crude. Some of them are located along the Yangtze River in the central part of China. We have real positioning in this area.

And we have quite a strong R&D team. And the R&D team is working on call to make a good configurations, to better use of our refinings to meet these trends.

So we are working on that. We have not only working with -- we have set up a designated team that consists of our R&D people, our production people, as well as our marketing people so that they are ready for that.

And they are not only working with those users on that, they also talk with the government authorities how can we have a mechanism to help to facilitate. This happens in the years to come or the two years to come and we are very pleased and we are very welcoming this IMO 2020.

In terms of the actual tax issues, I would like to hand it over to Mr. Sung, who can give you a broader color on this pricing area. Whether the government have the opportunity to examine this tax; otherwise, it may not be so profitable, but it will still be going to be profitable, given the price. I believe this could be easily higher than the higher sulfur content fuel oils.

(spoken in Chinese)

(spoken in Chinese)

(interpreted) Our comment is quite long if in attention to the tax of the shift to fuel oil. And we also have asked the condition for their response. According to the finance department and the tax department, think the related tax can be done, but the measures have not been decided.

Our Company really wants to enlarge our market of the shifting oil to be a new market to and new [increasement] for the Company. But it really depends on the tax condition of the China will further ask the related departments and just for some good policy. Thank you.

(spoken in Chinese) To the heating season, your coming heating season, how much of the gas we already committed to North China? So the contracts have been signed. So what volume has already been committed?

That is a pretty large question. This is out of our control. It should be a question to the NDRC people and who coordinate all the supply. But for my Company, we supply some 40 billion metric -- 40 billion cubic meters for the natural gas and we are fully ready. Thank you.

So 40 billion --

Is for our Company for the whole year.

But how much for the coming heating season? So from two months of this year, then two and half months next year. So the heating season, how much of the gas you already contract out for the heating season supply?

We have our numbers and that is a number, sorry, that is the confidentiality, given it is our corporate strategy. And we are sorry to have it to share this with you because the market as well as competitors, they are pretty much interested in these numbers. Thank you.

Thanks. That's all from me.

Chris Shiu, BosValen Asset Management.

(spoken in Chinese) I have got three questions, if I may. The first one is regarding a regulation. Recently we have read news that the NDRC has met with the three big Chinese oil companies regarding natural gas prices. So basically telling the companies not to hike natural gas prices.

So I like to understand whether there is any sort of regulatory pressure on the natural gas pricing front. And then what do you see for LNG import losses in the fourth quarter and next year? That is the first question.

Second question is also about regulations. So could you remind us how the refined oil product pricing mechanism would work if crude oil prices as defined by the NDRC go up above $80? How would refining margins be affected?

And the last question is regarding marketing. Do you expect any meaningful improvement in the fourth quarter and next year versus the current environment? Because if we exclude the nonfuel portion, it seems that the fuel sales parts, actually the proppant, is down year on year. So these are my questions. Thank you.

So the first two questions regarding the price and the pricing mechanism, I would like to have Mr. Sung to give you an answer. But I would like to take your third question first, the marketing business.

You are [through] right. If you took out the contribution from the nonfuel area, the fuels earning have been squeezed. This is a severe market situation and we have been experienced severe competitions in the area like in Hubei province, in Shandong province, and the Shanxi province in the area where we have a lot of the teapot refineries in the area, where lots of them, they may not pay -- they have some impacts.

And we are now, on the one hand, we have tried to improve our efficiency in this area. On the other hand, we are talking with local government as well as the federal government, try to set up have a better operation on the competitions environment.

And we have developed a lot of programs in that area. And since the competition seems to have been improved, but it still will take the time. And in this year and the year to come, we believe this competition still will be there.

But, at the same time, we also make observations on that. A lot of the international oil firms, they are in still entering into this piece of the market, that it can be improved overall market environment, I believe. And we are now not only working with our competitors or our partners. And we are also working with different suppliers of our products, try to improve the marketing environment.

And we are still -- we are very optimistic in the long run. But have a bit -- try to take measures for the actions in this short run. Thank you.

And Mr. Sung, please.

(interpreted) For the natural gas, this year, these are -- the state has made some adjustment to the natural gas price. And in September, the individual and non-individuals price has been getting together since September. And the state also starts to make the natural gas market more open to the world.

And we think in the winter, the demand will increase and -- but to our Company and PetroChina, we will obey the requirement of the state and increase the [no essentials] price up by 20%. But the [essentials] price will not increase.

And the government has not -- has give us the -- some notice to the big three companies. But it is to require us to be more regulatory and we do not have any pressure from the government.

And for the refining margins, according to the existing mechanism, if they are increased over $80 a barrel, the profit will decrease a little bit. So if the cost increase over $80 a barrel, our profit may be decreased and the price of crude oil products will decrease a little bit. But we will optimize our product mix and lower our cost to gain a better performance. Thank you.

There are no questions on the line. Now I would like to hand over back to the management for closing remarks.

Okay. Thank you for attending our conference call. This concludes this conference call for today. And if you have any further questions, please contact our investor relations department. We have IR representatives in Beijing, Hong Kong, and New York. Okay, thank you very much. Goodbye.

Thank you.

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.