Morningstar | Sinopec's Softer Refining Profit Offset by Higher Crude Oil Prices, but Gas a Drag; FVE Unchanged. See Updated Analyst Note from 31 Oct 2018
We keep our fair value estimate on Sinopec at HKD 7.50 (USD 96.40 per ADR) although we note that the company's third-quarter performance is somewhat disappointing with weak natural gas prices and a steeper-than-expected drop in refining segment profit. This leads to a 5% cut in our 2018 profit estimate, but because we raise our crude oil price assumptions for the coming quarter and through 2021, we revise our 2019-21 earnings higher. Our capital expenditure and midcycle forecasts for oil & gas prices are unchanged. We think the market is likely to favor CNOOC Ltd and PetroChina over Sinopec in this near-term rising oil price environment, but Sinopec's dividends remain attractive. Given risks, we'd like to see Sinopec get cheaper before buying.Following the company's positive profit warning, we were already anticipating a quarter-on-quarter decline in net profit of over 20%. Third-quarter net profit slipped to CNY 17.8 billion from second quarter's CNY 23.1 billion. The surprise to us was that average crude oil selling price at Sinopec was better than we expected at an estimated USD 71.42 per barrel, but natural gas prices slipped markedly from the prior quarter. The company's gas sales are loss making, and we suspect that this pressure on gas prices is likely to continue. China's current energy policy favors low gas prices in order to encourage a shift away from coal on environmental issues. As such, we lower our gas selling price in our explicit five-year forecast period.
Refining margins are normalizing with product prices lagging the rise in feedstock cost, but we anticipate a gradual decline. Our midcycle margin assumption remains at USD 6.50 per barrel. Sinopec management also guides that competition from teapot refiners will continue to dampen product sales in the next year. We think this will be offset by stable chemicals segment profitability.
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