Sinopec second-quarter profit falls 87% on oil refining losses
Source: 26-AUG-2008 Intellasia | Bloomberg
Aug 26, 2008 - 7:00:00 AM China Petroleum & Chemical Corp., Asia's biggest oil refiner, posted an 87% drop in second-quarter profit after government caps on fuel prices prevented the company from passing on record crude oil costs to consumers.

Net income declined to 2.19 billion yuan (US$320 million) in the three months ended June 30 from last year's 16.8 billion yuan, according to calculations made from first-half figures released today. Profit in the first three quarters may fall by more than 50%, the company said.

China controls fuel prices to limit their impact on inflation in the world's fastest-growing major economy, curbing refiners' ability to pass on crude oil costs. Benchmark crude in New York has doubled in the second quarter from a year earlier, with prices reaching a record US$147.27 a barrel on July 11.

"The refiner likely made a refining loss of as much as 70 billion yuan in the first six months,'' Yin Xiaodong, an analyst with Citic Securities Co., said by mobile phone in Beijing today. "The second-half should look a little better, as crude should ease and the government may further increase fuel prices.''

Sinopec's Hong Kong-tradedshares have retreated 36% this year, compared with a 27% decline in the city's benchmark Hang Seng Index. The stock fell 3.7% to HK$7.59 on August 21 before the earnings announcement. The Hong Kong market was shut on August 22 because of a typhoon.

The Beijing-based company's first-half profit fell 77% to 8.26 billion, beating the median estimate of 7 billion yuan in a Bloomberg News survey of seven analysts. Sales rose 31% to 722.4 billion yuan. Sinopec will pay an interim dividend of 0.03 yuan a share.

'Significant losses'

The company's refining business incurred "significant losses,'' Sinopec said, without giving specific numbers.

First-half total capital expenditure was 36.5 billion yuan, of which exploration and development spending stood at 21 billion yuan, it said. The company said it will speed up explorations in "key regions'' such as Tahe and northeastern Sichuan in the second half.

Sinopec said it plans to produce 21.24 million tonnes of crude oil and 4.2 billion cubic metres of natural gas in the second half. Crude refining volume may reach 89.75 million tonnes and oil-product sales are expected to be 64 million tonnes during the period, it said.

Sinopec increased crude processing by 6.7% to 84.25 million tonnes in the first half to meet higher demand for fuels and chemicals, the company said on July 18. Crude output climbed 2.4% to 147 million barrels while gas output rose 3.3% to 144 billion cubic feet, it said at the time.

Subsidy, Windfall Tax

The government paid Sinopec and PetroChina Co., the nation's largest refiners, rebates of 75% on the 17% value-added tax levied on crude oil imports in the second quarter.

Sinopec was paid a subsidy of 22.93 billion yuan in the quarter and a tax refund of 3.07 billion yuan for imported fuels, the company said in today's statement, without saying whether the assistance will continue for the rest of the year.

The refiner received 4.9 billion yuan in subsidies to offset refining losses in 2007 and 7.4 billion in the first quarter of this year, it said in March. It received a 9.42 billion yuan subsidy in 2005 and 5 billion yuan in 2006.

Sinopec's windfall tax payment increased by 13.3 billion yuan in the first half, the company said. The tax levy on revenue from crude oil sold at more than US$40 a barrel was 3.1 billion yuan between January and June of 2007, it said last year.

Higher fuel prices

China raised the prices of gasoline, diesel and jet fuel by at least 17% on June 20, the first increase since November, in a move to help ease the nation's fuel shortfalls.

Sinopec was losing about 3,000 yuan on each tonne of refined products because of near-record crude oil costs, the company's spokesman Chen Ge said in May before the fuel price increase.

Sinopec forecast a jump in 2008 capital spending to 121.8 billion yuan from last year's 109.3 billion yuan, it said in April. The company plans to spend 60.1 billion yuan on exploration and production, including expediting construction on a project to pipe gas from the Puguang field in Sichuan province.