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Morningstar | Lowering Sinopec's FVE on Weaker Oil Near-Term Oil Prices

China Petroleum & Chemical, better known as Sinopec, is the listed arm of one of China's two integrated oil majors and one of Asia's largest refiners and chemical companies in terms of revenue. Owing in part to historical legacy, Sinopec’s revenue and assets are more heavily weighted toward its downstream activities and the company relies on external sources of oil to meet its refining and processing needs. As a result, Sinopec’s earnings are generally less sensitive to oil prices swings than peer PetroChina's, and so it benefits less in a rising oil price environment but is also more stable when prices fall.Sinopec’s key Shengli oilfield, which makes up 71% of group reserves, is maturing and it is a higher-cost producer of oil and gas than its peers. This is the main reason we think Sinopec has no moat. However, the group’s refineries do enjoy logistical advantages, as they are located close to customers, have scale benefits, and are relatively complex. Sinopec has also benefited from the country moving to a more market-oriented pricing mechanism that better matches petrol product pricing to input costs. However, a key risk remains the government’s willingness to pass on higher costs to consumers in an inflationary environment.Healthy refining margins, robust petrochemical prices, and contained spending have allowed Sinopec to shore up its cash position since 2014. Although we expect downstream earnings to face pressure as margins normalize, we still expect Sinopec to see free cash flow of around CNY 100 billion-CNY 110 billion annually. The likely spin-offs of its marketing arm and its oil and gas pipelines will further boost its financial position, with the latter expected to reduce expenditure on developing its own pipelines. As such, we think dividend per share is likely to be stable averaging around HKD 0.50. This should allow for an attractive dividend yield that lends support to the share price.We would not be surprised to see the company resume its search for upstream assets, as its reserves life has fallen to seven years. Given its net cash position, Sinopec has room to raise spending if there are any attractive opportunities.