中國石化 (SNP) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen. This is [Jen Liu] of P.R. China. Welcome, everyone, to Sinopec Corp's earnings conference call for the first quarter of 2019. Please be reminded that the results presentation for the first quarter of 2019 can be downloaded at www.sinopec.com. (Operator Instructions)

Now I would like to transfer the call to Mr. Xiaoming Jiang, representative of securities matters of Sinopec Corp. Mr. Jiang, you may begin.

Thank you, Jen. Ladies and gentlemen, welcome to Sinopec's first-quarter earnings conference call. Presenting today in Beijing are Mr. Wang Dehua, our CFO; Mr. Huang Wensheng, Vice President and Secretary to the Board; and Mr. [Wang Zhigang], Deputy Director General of production and operation department; Dr. Chen Ge, Deputy Director General of the Board Secretariat.

First now, I would like to invite Dr. Chen to go through with you the presentation. Dr. Chen, please.

Thank you, Mr. Jiang. Ladies and gentlemen, before we start, let me highlight the cautionary statement. In the first quarter, China's GDP grew by 6.4% year on year. International crude price realized a rebound from low level.

Domestic consumption of oil products maintained growth with apparent consumption of gasoline and kerosene up by 3.7% and 6.3%, respectively. Domestic consumption of ethylene equivalent grew by 7.4%.

In the first quarter, the Company's turnover and other operating revenues grew by 15.5% year on year. EBIT was RMB27.1 billion. Profit attributable to shareholders was RMB15.5 billion, with EPS was RMB0.128, down by 19.9% year on year.

Monthly speaking, the Company's profitability showed a relative growth momentum. We moderately increased debt with low interest and maintained our solid financial position. By the end of March this year, the Company's liability to asset ratio was 51.4%, increased 5.2 percentage points over the end of last year, mainly because of the implementation of new business accounting standard in this year. At the end of reporting period, the net asset was RMB738.6 billion, up by 3%.

With the upward trend of crude oil price, the Company's occupation of working capital increased. Net cash used in operating activities was RMB14.6 billion, mainly because we paid more tax payable for last year in the first quarter.

Net cash used in investing activities was RMB25.6 billion. Net cash from financing activities was RMB29.4 billion. Cash and cash equivalents, including time deposits, at the end of the reporting period was RMB168.4 billion, up by 0.8%.

In the E&P segment, we enhanced high-efficiency exploration with new discoveries in Jiyang Depression and the Sichuan Basin. We adopted a profit-oriented approach to reinforce the resumption of oil production. We also accelerated construction of natural gas production supply storage and marketing system to achieve revenue growth in natural gas production.

In the first three months, oil and gas production grew by 1.9% year on year, in which domestic crude production maintained stable. Natural gas production grew by 6.7%. Our realized crude price averaged USD57.66 per barrel; realized gas price, USD7.07 per Mcf, up by 12.6%.

We took great efforts to control costs, with oil equivalent lifting costs maintained flat and all-in cost decreased by 7.8%. EBIT of E&P segment was RMB2.9 billion, indicating a significant growth in profit.

In refining, the Company proactively adjusted the product slate, improved the production volume of gasoline jet fuel and other high value-added products. The diesel to gasoline ratio further down to 1.01.

We comprehensively optimized the operation of production plans to maintain a high utilization rate. At the same time, we pushed ahead with the implementation of bunker fuel quality upgrading plan in accordance with the IMO 2020 standard.

In the first quarter, refinery throughput grew by 2.7% and the refined oil products production grew by 3.8%, among which gasoline up by 5.9%, kerosene up by 6.6% over the same period of last year. In the first quarter, the refining margin was USD8.38 per barrel. Cash operating cost was USD3.18 per barrel, down by 10.8%. EBIT of refining segment was RMB11.6 billion.

In marketing segment, the Company effectively [competed] the fierce market competition by bringing our advantage of a distribution network into full play and achieved relatively big increase in both total domestic sales volume and retail volume of refined oil products. We enhanced our marketing network advantage by optimizing the layout of service stations and refined oil product logistics.

Meanwhile, we spared great efforts in cultivating and developing business of natural gas for automobile. In the first quarter, total domestic sales volume and retail volume grew by 5.2% and 2.5%, respectively. Annualized average throughput per station was 3,939 tonnes, increased 2.4% over the same period last year.

In the first quarter, we achieved continuous growth in nonfuel business. Business profit was RMB988 billion, up by 15.6% year on year. Marketing cash operating cost was down by 12.4%. The EBIT of marketing segment was RMB8.2 billion, realized a significant rebound quarter on quarter.

In chemicals, the Company optimized the feedstock mix to reduce cost. We further optimized product slate to increase the production of high-value-added products. We enhanced the dynamic optimization of facilities and the product chain by appropriately arranging utilization and scheduling.

In the first quarter, ethylene production up by 1.8%. Synthetic resin production increased by 1.5%. Synthetic fiber monomers and polymers production up by 14.6%, and total chemical sales volume grew by 14.3% over the same period last year.

We are constantly optimizing the structure of feedstock products and facilities. Good chemical gross margin was kept. Chemical segment EBIT was RMB8 billion for the first quarter, up by 54.5% quarter on quarter.

For CapEx, the Company focused more on developing the quality and efficiency and strengthened the management of investment return. CapEx for the first quarter was RMB11.9 billion. E&P was RMB5.56 billion, mainly for construction of oil and gas production capacity, gas storage, and pipelines. Refining was RMB2 billion, mainly for Zhongke refining product and the structural adjustment of product slate.

Marketing was RMB2.52 billion, mainly for construction of refined oil product depots, pipelines, and service stations as well as nonfuel business development. Chemicals was RMB1.8 billion, mainly for construction of Zhongke, Zhenhai, and Wuhan ethylene products.

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

Thank you, Mr. Chen, for the presentation. Ladies and gentlemen, this concludes the prepared remarks for today and we are now ready for questions. (Operator Instructions)

Andy Meng, Morgan Stanley.

Thank you for the presentation. I have two questions. The first question is on the refiner segment. So if we look at the refinery segment, we see the EBIT for the segment declined a bit. But we are very keen to know whether we have inventory gain, inventory loss in the first quarter. Can we elaborate more regarding the calculation on this inventory -- this issue?

The second question is regarding our cash flow. So if we look at the Company's cash flow in the first quarter, we are basically seeing that the number versus last year sees big change. So we want to know the key reason why we are seeing such a large [disparance] or difference on the cash flow, especially operating cash flow in the first quarter. Thank you.

(interpreted) The increase, the reason for the inventory increase is mainly because of the price difference of low sulfur oil and the high sulfur oil. And the total number is about RMB1.6 billion. In addition, the increase in price was -- the increase in freight of the crude oil is about RMB3.20 billion. And well, in fact, see profit of about RMB3.0 billion. And the price difference between the light oil and the naphtha will also be decreased.

The third factor is the light chemical feedstock, the spread between light chemical feedstock and crude squeezed. This kind of impact is around RMB3 billion. And also the other products, such as asphalt, petro, and coke, this kind of product realized margin also squeezed.

(interpreted) So first of all, I want to make sure that the cash flow position is kept stable without great changes. And there are two reasons for the change of the cash flow, especially the operating cash flow, the cash flow used in the operating activities.

The first reason is that the oil price is increasing from the beginning of the year and the inventory amount of the oil and refined oil products also increased. So the inventory change is great. And the second reason is about the tax issue. So we paid more tax payable for the last year in the first quarter of 2019.

Thank you.

Lawrence Lau, BOCI.

(spoken in Chinese)

(interpreted) So I want to tell you -- I want to answer the question of three firstly. So the change of the top grade and others decreased about RMB2.7 billion in the first quarter of 2019.

There are two reasons. The first one is the promotion of the personnel expenses and it will be determined in the next few months based on the situation of the Company.

And the second reason is that the losses of the derivative financial installments and the amount is about -- and the losses, the amount of the losses is about RMB1 billion. And in my opinion, I think the losses of the corporate and others will be flat is because of the crude oil price will be flat in the next few months.

So for the second question is that the market EBIT, the decrease of the EBIT in the marketing segment is mainly because of the fierce market competition and the margin of the retail price and of the wholesale price squeeze. In addition, there is also the contribution from the [enrichment] losses, which is about RMB1 billion.

For the first half of this year, there is no contribution come from inventory change, inventory gain. For last year there is some RMB1 billion inventory gain booked in the operating profit of marketing company in Q1 2008 (sic).

(interpreted) And in the nonfuel business, we also held to the high-quality development. So the profit of the total operating profit of the nonfuel business, it decreased about 15% year on year and achieved about 9.8 increase -- RMB9.88 billion. And we also achieved applied to revenue in the nonfuel business.

Thomas at HSBC.

Gentlemen, thank you very much for your presentation, and well done on the results. I have two questions really related to the upstream business. I'm wondering if you can explain why there was a divergence between the oil price, which seemed to be relatively soft compared to peers, and the gas price, which was a very good strong result above $7 per unit. That is the first part of the question.

And the second part of the question is can you talk about the structural changes that you have made in the E&P business that allowed you to be profitable this year? What were the cost structures and what were the losses related to LNG imports? Thank you.

(interpreted) So the realized oil price is normal in our Company and it is also market-based. And in addition, the trend of the realized oil price is the same [way the] Dubai price. And secondly, the natural gas, the price of the natural gas is affected by the price determined by the system, which is regulated by the nation. And as for the losses on the LNG business, the losses is about RMB1.9 billion in the first quarter of this year.

(interpreted) So in the E&P segment, we also reinforced the management of cost control and all there -- and we achieved a decrease in the all-in cost of the E&P segment, where the crude oil -- where the international price of the crude oil decreased as compared with the same period of last year. In the face of the LNG losses, we also achieved a profit in our E&P segment.

In terms of the cost structure, you can tell from -- the overall costs have been declined and we keep the priority in terms of lifting cost. But the [DVMA] have been declining thanks to the reserve life increase during last year's efforts. That leads the overall cost decline. That is a significant contribution to our earning growth in the upstream side. Thank you, Tom.

Aditya Suresh, Macquarie.

Yes, thank you. The first question is on your CapEx. Can you help us understand this disconnect between the budget versus actual spend? And within that, specific to E&P, given your ongoing ROE focus, we understand that with a [falling] Phase 2 the economics may not be as good as what you had hoped for.

I guess what I am trying to understand is if Sinopec comes in meaningfully below your CapEx budget for this year. And so any commentary around that would be helpful.

The second point -- the second question, rather, is on marketing. Any updated timelines on the spinoff? It seems at least on the surface that the IPO may not be a meaningful priority. Can you just -- any commentary on that is useful.

(interpreted) Based on our reported the CapEx, every quarters the first quarter is we have some seasonality, actually. The first quarter will be lower and eventually catch up. But up to now, we do not have any intention to change this budget for the whole year. The investment for the upstream side will be invested in the oil discovery as well as natural gas. And at the same time, we also put a lot of money in terms of the pipeline construction area.

So we have explained during our annual results announcement actually one-third of the CapEx will be related to the pipeline issue and two-thirds will be in the exploration of the oil and the gas and the significant part will be in the conventional gas area. In terms of our marketing potential IPO up to now, we do not have a timeline. Thank you.

(Operator Instructions) [Lorraine Kim], Morningstar Asia.

Yes, hi, good morning. Congratulations on a good set of results. I have two quick questions. I just wanted to clarify; you had a nice drop in your SG&A costs under IFRS. I just want to check, was this related -- this is what helped the E&P segment become more profitable or -- and what specifics in terms of the SG&A declines or cuts was it related? So if it was under IFRS.

I just want to double check. Under your noncurrent assets, there is an item called right-of-use assets. Is this related to the change in accounting regarding leases? Thank you.

Sorry, can you repeat your second question?

Yes, regarding on the consolidated balance sheet under IFRS, there's a line item that is not previously been called right-of-use assets. I'm just confused what this item is for and specifically relates to the change in accounting policy. Or is it an internal change [management] (technical difficulty).

Actually, I would like to take your second question first. And maybe my colleague will talk with you on the first question. So thank you for your question about our -- the P&L balance sheet.

And the change in the balance sheet as a significant change will be from those changes in the China, the gaps of the [coking] side. A lot of them related to the leasing part, that change of our assets as well as the liabilities. You will be right for this change and should any further details need questions, my IR people will be more than happy to talk with you in more details.

For the first question in terms of SG&A part, we have put a lot of efforts in this area. But the first quarter we may have some seasonality issue. And that is a part of the contribution to the earnings growth in the E&P part, but we hope we can be sustainable. Thank you.

Right. So just sorry; there was a slight interruption in my phone just now. Just to clarify, so the SG&A decline, there is some seasonality there. So does that mean we should expect it to normalize during (inaudible)?

Yes, exactly. But we have put a lot of [pictures] in that regard, but you can put these in normal line.

Right. Thank you.

[Phil], JPMorgan.

Thank you for taking my questions. So a question I have is in terms of your marketing and chemicals segments, you said that performance in the first quarter have improved compared to last quarter. What are the factors driving this?

And also, my recollection is in the first quarter you mentioned that competition for marketing was intense. Do you see the situation improving this year and the outlook for these two segments for this year would also improve as well? Thank you.

The marketing business on the [Campos] business today is fully open for the competition, actually. And if you look at the marketing business, there are a lot of alternative supply and the competition is severe.

That have been start for two years ago. And in the first quarter, we see a lot of competition and this competition still will be there. And we have put a lot -- we are doing a lot in fighting against this competition, including the customer loyalty program as well as increase a lot of the sales of the high-value-added products, like high octane number of the gasoline side that will charge high margins.

And we also increase the pump volume per site. You can tell from the first-quarter results the volume growth was some 2.4 pump volume per site. That is also very supportive in terms of the margin [error]. And we believe, although the competition will still be there, but we are comfortable we can handle this.

And for the chemical area, it's a fully open area and there are a lot of the supply, not only in China but globally. And we are happy to see that demand in China continues to be very strong in the first quarter. The year-on-year growth was some 7.4%. And we are the largest providers and we provide a lot of the not only the commodity today, but a lot of the specialty oil performance compounding today and that also will be very helpful.

We believe the whole year -- if you look at the global chemical margin, we believe this year it's going to be another good year, but not an excellent year. And we are doing a lot in terms of the products mix, optimizations, such as optimization on the feedstocks the first quarter. And we delivered this result and we hope we can sustainable. Thank you.

Toby Shek, Citigroup.

(spoken in Chinese)

(spoken in Chinese)

Marcus Chu, Goldman Sachs.

Hi, management. Thank you. Can you help us understand what is the recurring refining margin in first quarter this year? And also the refining margin for April? That's the first question. The second is can you share with us what's the latest timeline for the Gulei and Zhongke refineries? Thank you.

(interpreted) So my answer for the first question is that the refining margin will be improving in the next months.

And I'm going to give you some guidance on the project construction for Gulei, as that was expected to be completed end of next year, year 2020. And the Zhongke project will be commissioned in the middle of the next year.

Huang, Lili, CITIC Securities.

(interpreted) So my first question is that you mentioned that the price difference of heavy and large will influence the refining margin. So does the Company will optimize the sort of crude oil to improve the refining margin? And the second question is that what is -- could you explain the inventory position of the refined oil products?

(interpreted) So the answer for the first question is that in the first quarter of 2019 the price difference of low sulfur crude oil and high sulfur crude oil will have a big influence on the refining margin of the Company. And we are also push ahead of the adjustment of the structure of the crude oil importation.

And as for the inventory position, there will be an increase of about 2 million tonnes of the refined oil products compared with last year. Thank you.

Scott Darling, JPMorgan.

Hi, thank you for taking my questions. It's Scott Darling here at JPMorgan. You mentioned that refining margins will recover next month, I think you said in the other question. Have you been surprised how weak refining margins are? And do you think eventually we can get back to sort of the margins we saw in 2018?

Maybe also answering this question, could you give us some outlook on what you think Chinese oil product demand will be? I notice on slide 3 you didn't even mention domestic diesel demand at all. And government data seems to suggest it's pretty sluggish.

And also, we have obviously seen first quarter very high net oil product exports out of China. Do think that could maintain as well (technical difficulty). So that's -- the first question is around refining.

Then the second easy. Your full-year production target; I'm assuming that's unchanged? Yes or no. And then my third question is crude and oil product inventory for you seems to increase quite sharply last quarter. Do you think -- why was this and do you think that will continue? Thank you.

Scott, may you repeat your second question?

I mean, I'm assuming your full-year production target -- targets for oil and gas is going to be unchanged. I mean, gas was particularly strong. Is that a yes or no or could you even beat the target?

(interpreted) So as for the refining margins, in the past few years, the Company -- the refining margin of the Company is kept at a very profitable level. And also the refining margin will be influenced by the [temp ride] and the crude oil structure.

And secondly, I want to tell you is that the price difference between the low sulfur crude oil and the high sulfur crude oil has an influence on the refining margin. And in addition, the bridge of the crude oil will also make a contribution to the refining margin.

And if you ask me if the refining margin will be recovered to as the same with last year, I want to tell you is that we will adhere to the optimization of the structure and operation to maintain our very profitable refining margin in the future. Thank you.

The second question for the oil and gas productions will be -- the target will not be changed. The third question in terms of the inventory of the crude oil and our product side is fairly related to our operations as well as a response to the change of the crude price scenario.

We have just now referred to the inventory of the crude being increased. That is mainly because the response low cost of crude in the beginning of this year, given the inventory -- our inventory will come from outside of China, that will take roughly two months of the transportation times. So the cost is relatively lower.

For the products inventory, also response to the demand, given the China demand will pick up starting with spring. After the spring festival, demand will pick up and we want to meet this demand growth. The overall inventory days is in our management inventory period or inventory times, inventory days. Thank you for the three questions.

Considering the time, thank you very much. This concludes our conference call. If you have any further questions, you may contact our investor relations department. Thank you and good day.

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.