China Petroleum & Chemical Corp

SSE:600028

Earnings Call Transcript 2021-Q1

[Jane Liu]

Good morning, ladies and gentlemen. This is Jane Liu of PR China. Welcome everyone to Sinopec Corp.'s Earnings Conference Call for the First Quarter of 2021. Please be reminded that the results presentation for the first quarter of 2021 can be downloaded at www.sinopec.com. [Operator Instructions]

Now I'd like to transfer the call to [ Mr. Zhang Jung ], Head of the Board Secretary of Sinopec Corp. [ Mr. Zhang ], you may begin.

[Unknown Executive]

Thank you, Jane. Good morning, ladies and gentlemen. Welcome to Sinopec Q1 results announcement, and thank you for your joining us today. This meeting is attended by Mr. Wensheng, Vice President and Secretary to the Board; and [ Mr. Sang Jinghua ], Deputy Head of Finance Department; and [ Madam Didi ], deputy Head of operational department. First, I would like to give the floor to [ Mr. Chen Yang ], Deputy Head of the Board of [ Secretant ] to present you the performance of Q1. [ Mr. Chen ], please.

[Unknown Executive]

Thank you, [ Mr. Zhang ]. Good morning, ladies and gentlemen. Firstly, I will review on our performance of the first quarter. The effects of global epidemic prevention and control have gradually emerged when the China's economy maintained recovery growth with GDP up by 18.3%. International crude oil price [ kept ] growth and the spot price of class Brent for the first quarter averaged USD 60.9 per barrel, up by 21.2% year-on-year. The domestic demand for refined oil products recovered steadily, while natural gas and petrochemical demand maintained rapid growth.

To promote the efficiency and the profitability of the whole industrial chain and comprehensively promote high-quality development, the company actively responded to market changes and optimized production and operation arrangements, and achieved outstanding performance. In the first quarter, our EBIT was CNY 33 billion, up by CNY 59 billion year-on-year, and also better than the first quarter in 2019. All the 4 segments achieved good results.

Profit attributable to shareholders was CNY 18.5 billion, up by CNY 37.8 billion year-on-year. EPS was CNY 0.153. In the first quarter, we increased low-cost financing, and comprehensive finance cost was 2.7%, capped at low level. Debt-to-asset ratio was 49.5%, maintaining our strong financial position. Equity attributable to shareholders of the company was CNY 764.7 billion.

For our cash flow, due to the payment for deferred tax of last year, net cash generated from operating activities was negative, but much better than the same period of last 2 years. To ensure the liquidity of the company, we raised CNY 28 billion of short-term debt and issued CNY 30 billion of [ super ] short-term commercial paper with low interest. Net cash used in investing activities was CNY 24.1 billion, and cash generated from financing activities was CNY 51.1 billion. Our cash and cash equivalents reached CNY 198.1 billion, up by 5.3% compared with the beginning of reporting period, providing a strong backup for our future growth.

For upstream, in the fourth quarter, the company continuously pressed ahead with high efficiency exploration and profit-oriented development, accelerated systematic construction of natural gas production, supply, storage and marketing and achieved tangible results in maintaining oil production, increasing gas output and cutting costs. The company's production of oil and gas reached 117 million barrels of oil equivalents with natural gas production reached 292 Bcf, up by 17% year-on-year.

In addition, we enhanced the expansion of natural gas market with sales volume up by 37% year-on-year. We strengthened cost control and enhanced competitiveness through improving efficiency. In the first quarter, lifting cost was $15.9 per barrel, slightly increased. Excluding the impact of renminbi appreciation, our lifting cost decreased by 5.4%. Realized crude oil and natural gas price was USD 54.9 per barrel and USD 7.1 per 1000 cubic feet, up by 11.7% and 9.9%, respectively.

Upstream results improved significantly with EBIT reached CNY 3.1 billion, up by 54.1% year-on-year. For refining, in the first quarter, we brought the advantage of integrated refining and marketing into full play at a high utilization rate and significantly increased refinery throughput, which is 62.5 million tonnes, up by 16.3% year-on-year. Based on market needs, we intensified product slate adjustment and increased output of marketable and high-profit products, such as gasoline and light chemical feedstock. We coordinated the whole process management of crude oil supply to lower procurement costs. We also sped up the construction of advanced capacity and promoted structural adjustments.

In the hydrogen business, we accelerated the construction of hydrogen producing units. Through these efforts, we realized a record high refining margin of USD 11.75 per barrel. EBIT for this segment was CNY 19.9 billion, achieving a turnaround in profit year-on-year and also have 63.7% higher than that of the same period in 2019. For marketing, in the first quarter, we brought the advantage of marketing network into full play continuously expanding the market with a substantial increase of domestic sales volume and retail scale.

We constantly optimized the network layout to reach end users and improve the network integrated stability and competitiveness. We also promoted the construction of hydrogen charging and battery swap stations to improve the capability and the services of comprehensive energy supply. Domestic sales volume was 40 million tonnes, up by 23.2%. Retail volume reached 25 million tonnes, up by 24.4%. We depended -- we deepened non-fuel business reform and improved membership system. Non-fuel business profit was CNY 1.4 billion, up by 87%. EBIT for the segment was CNY 8.6 billion, realized significant growth year-on-year and better than that of the same period in 2019. For chemicals, in the first quarter, the company further fine-tuned chemical feedstock mix and well controlled feedstock costs. We integrated production with marketing, strengthened research on market needs to increase the ratio of high value-added and high-end products.

Ethylene production was 3.4 million tonnes, up by 11.7% year-on-year, and the total chemical sales volume was [ 19.8 million ] [indiscernible] tonnes, up by 10.5%. Domestic chemical demand was robust in the first quarter. We optimized product slate and feedstock structure, well controlled costs, and realized very good margin. EBIT was CNY 8.93 billion, made a turnaround year-on-year and 4% higher than the end of the same period of 2019.

For CapEx, in the first quarter, our CapEx was CNY 23 billion, mainly used for the construction of natural gas industry [ tran ], advanced refining capacity and supporting the transformation and the development of the company. CNY 9 billion was in E&P, mainly for oil and gas capacity building and R&D projects. Refining accounted for CNY 7.6 billion, mainly on Anqing refinery structural adjustment and expansion of Zhenhai. CNY 2.9 billion was in marketing, mainly for construction of service stations, hydrogen stations, depots and the nonfuel business. Chemicals accounted for CNY 1.8 billion, mainly on building advanced production capacity, including Zhenhai, Tianjin [ Nandan ] and the Amur projects. The capital expenditure for others was CNY 1.7 billion, mainly for R&D facilities and IT projects. That's all for the presentation. And now the management is glad to take your questions. Thank you.

[Unknown Executive]

Thank you, [ Mr. Chen ]. We now open the floor for Q&A, please.

[Jane Liu]

Ladies and gentlemen, this concludes the prepared remarks for today, and we're now ready for questions. [Operator Instructions]

Operator, please start taking questions.

[Operator]

[Operator Instructions] The first question is Lawrence from BOCI.

[Lawrence Lau, analyst]

[Interpreted] Okay. I would like to take the first question. So the total imported LNG volume for the fourth quarter was around 5.2 million. And for the whole year, the total volume would be the 17.4 million tonnes.

[Unknown Executive]

[Interpreted] And I would like to take your second question. So in order to maintain a stable operation, the company normally keep the inventory of the crude oil, at [ candidate ] processing less volume level. And so in the first quarter, the inventory gains of refining segment was around RMB 8.8 billion.

[Operator]

[Operator Instructions] And the next question is Tom from HSBC.

[Thomas Hilboldt, analyst]

Gentlemen, congratulations on the performance. It's Tom Hilboldt here. I just wanted to ask you, the cash balances continue to build here. You're almost at RMB 200 billion of cash and cash equivalent. When are we going to hear more about what your long-term strategy is with regard to balance sheet management and the application of that cash?

[Unknown Executive]

[Interpreted] Thank you, Tom, for your great questions. Yes, the first quarter result was sound and the companies try to manage the sustainable development in the various business units. And in the whole year, we expect that the company continues deliver the momentous growth, given the economic growth in China will be continues strong and demand in China. So our products as well as the chemical products will be continue strong. At the current environment, we are very confident on the earning power. And at the same time, we are trying hard to manage the cash flow. And you are absolutely right. We have built up the cash around some CNY 200 billion. And we also have -- make our CapEx plan this year. It's going to be around CNY 150 million to CNY 160 million. And apart from that, we also have the dividend payout at the same time to try to control the gearing. So you can find -- you can tell, so the investment, we will try to manage the growth and the company also have the existing dividend payout decline. So all those areas are the major area of how our cash will be allocated. Thank you.

[Operator]

[Operator Instructions] The next question is Rui Hua Ong from JPMorgan.

[Rui Hua Ong, analyst]

This is Parsley Ong from JPMorgan. I would like to check, your E&P earnings in first quarter was pretty good. Could you give us an update on your all-in production cost? And over the next few years, what are your plans for cost reduction? And how do you plan to achieve this?

[Unknown Executive]

[Interpreted] So the all-in cost for oil and gas was around $38.2 per BOE and increased around $2.3 per BOE compared with the same period of last year.

There are 2 major reasons. The first is that according to the accounting policy, we have made some impairment in the upstream FX impairment in the last year. So the SEC reserves we used this year decreased. And because of this, the D&A, the DD&A increased. And in addition, our lifting cost maintains stable compared with the same period of last year.

And in the future, the E&P segment will take the strategy, which was to maintain a stable oil production and to accelerate the gas output and to decrease the all-in cost to further decrease our reduction the all-in cost in our E&P segment. We also have applying in our 14th 5-year plan carrier; that is, to decrease our all-in cost of the domestic crude oil to around $45 per barrel.

[Operator]

[Operator Instructions] The next question is [ Li Hong Ling ] from Morgan Stanley.

[Unknown Analyst]

[Interpreted] I have 2 questions. The first was regarding the chemical margin. Currently speaking, the chemical margin was pretty good. So I want to know the company's outlook for the chemical market. And the second question was regarding the new energy outlook. I know the company has some cooperations with a lot of new energy companies such as [ Meo ]. So I want to know if the company has a future plan or cooperation with other private or new energy companies.

[Unknown Executive]

[Interpreted] So in the first quarter, the company grabbed the opportunity of the good chemical market to optimize our feedstock mix and our product slate to maintain our high level run rate. And we realized a good -- relatively good performance of chemical segment in the first quarter.

And currently speaking, the domestic economy kept a good recovery growth. And in addition, the overseas, the pandemic situation in the overseas countries are much better. So I think, generally speaking, the demand for chemicals would be at a high-level growth.

And for the -- from the view of the supplying side, some chemicals price will increase. Some chemicals price was increasing in the first quarter, but there will also be some new advanced domestic capacity will be put into operation [ concentratedly ] in the next few quarters. So it is hard to anticipate if the price of the chemical margin will increase or not. But for the company, we will hold our strategy, that is to optimize the product slate to maintain or to fulfill the demand of the market to achieve a better performance in the next few quarters. Thank you.

[Unknown Executive]

[Interpreted] So for our company, we are the largest one-stop energy service in China, and we have more than 60% market share for the automobiles. And we have also a very large network, which was around 30,000 gas efficient. So we can not only provide the total sales for the automobiles, but also can provide some new energies such as solar, such as for EV cars or [ battery ] for EV cars. So in the future, we will actively explore the cooperation to set up a new business model to fulfill the demand of the customers and to continue to enhance our leverage of very large network to fulfill our customers. Thank you.

[Operator]

Okay. And the next question is Neil from Bernstein.

[Neil Beveridge, analyst]

Yes. Two questions really around, again, the new energy business and specifically on hydrogen plans. So you've talked about rolling out, I think, 1,000 hydrogen stations by 2025. Can you talk about how much the CapEx is going to be for this? And what kind of margins you'd expect in that business? Would it be higher or lower than your existing fuels marketing business margins? And secondly, in terms of the hydrogen supply, will that come from the existing supply within Sinopec? I think you produce about 3.5 million tonnes per year. So will it be from existing hydrogen supply or will you be investing in new green hydrogen production facilities?

[Unknown Executive]

[Interpreted] Yes. Thank you. I would like to take these 2 questions. For the first one regarding the hydrogen business. The company have carefully following the domestic policy and the international policies. We are the leading company of the global compact and we are a member of a lot of those initiatives to the cleaner burned energies. So in last year, the President of Chinese -- President Xi Jinping announced that China will make ambitious plan to fulfill the carbon [ peak ] on the carbon neutrality. And after that, the company also make a plan to take the practical measures to -- as a company, we should be to be a practitioner and to make a concrete plan to deliver that, and hydrogen is a part of the solution of the carbon [ peak ] and the carbon neutralities. And based on our existing plan, we want to -- we plan to build some 1,100 stations in China. And to be honest, us, we are going to start in this year for 100. At the moment, we have -- we are operating some 10 stations. And the 2 out of the 10 today is breakeven, 1 in -- one in Guangdong, another one in Shanghai, but 8 out of those 10 still in red.

The major reason for that is a lack of applications and there are very few those trucks on the road. So it's kind of the chicken and egg issues. However, we believe we are the leading company. We have existing facilities. And we have a lot of advantages to install this infrastructure to booming on helping to incubate this hydrogen business in China. So the 100 stations will help that the development of those fuel cell cars and the fuel cell vehicles. I believe in the second half of this year, the Chinese government will launch its promotion of all incentives and policies to help the development of hydrogen vehicles. And those policy will be -- we believe will be very positive to trigger the further development of hydrogens. And our existing satellites, networks will be a great help in terms of the infrastructure to boosting the hydrogen's development. And for -- currently, based on the current model, the 1 station cost will be around some CNY 20 million. And it's fully equipped with the hydrogen plant with -- in COVID with the exist in the petrol stations. And we believe through this combination of this 2 kind of services, the station can manage the breakeven on the mix on profit, because some of the major projects come from fuel side and eventually, the hydrogen will make a breakeven. For the hydrogen longer-term investment, currently, the major hydrogen will come from our existing operations from our refining [ sort of PSA ] to purify the hydrogen to meet the 99.999 purity of hydrogen, that is fuel cell-enabled hydrogens today. However, in short term, we are also considering to make the investment to build the [ PAM ] in the stations to help to serve the fuel cell their cost. And also, we are looking at the opportunities to liquefy the hydrogen or work with our other partners to monitor those infrastructures. At the same time, we also starting some of the applications of hydrogen is not only used to the mobility areas, it's also can be used in our chemical feedstocks in certain areas that the alternative energy can be pretty low cost. So we are working on that and we are going to announce in the next year of those detailed plans. Thank you.

[Operator]

And the next question is [ Mule ] from JPMorgan.

[Unknown Analyst]

[Interpreted] I have 2 questions. The first question was regarding the dividend policy for the company and what is the outlook for the whole year payout ratio. And the first -- and the second question was regarding the refining run rate. So I know in the future, there will be some maintenance in the refining facility. So the overhaul will impact the run rate of the refining segment.

[Unknown Executive]

[Interpreted] So the company always values the return to our shareholders. We would like to supply a long-term, stable payback to our shareholders by a high-quality development as well as to maintain a stable and continuous sustainable dividend policy. So you can see that in the first half of last year, the company suffered a loss, but we still pay a special dividend to our shareholders to maintain the sustainability of our dividend. So for the whole year dividend payout ratio of 2020, the payout ratio was more than 73%. And I think in the future, the management of the company will also value the return of our shareholders and maintain a good level of payout ratio.

[Unknown Executive]

[Interpreted] In the first quarter, the run rate of refining facilities was 91.7%, increased 7 percentage compared with last year. And in addition, the run rate of [ buy selling ] facilities was 98.8% increased 5 percentage compared with last year. As well as the PX run rate was around 93% increased 6.8 percentage. And we will have some overhaul in the second quarter. And I think the maintenance plan will not impact the run rate of our refining and chemical facilities very much, because we have a role to improve or increase the run rate of other facilities to offset the maintaining facilities. And generally speaking, I think the run rate of refining facilities will be more than 90% in the second quarter, as well as the run rate of ethylene and the PX facilities will also be more than 95% or 96% in the second quarter.

[Operator]

The next question is Matty Zhao from Merrill Lynch.

[Yanlin Zhao, analyst]

[Interpreted] So I have 2 questions. The first question was regarding the natural gas business. I know in the context of carbon -- of the Chinese government carbon emission picking and carbon neutrality targets. So what is the production plan of the company for the natural gas business? And I would also like the company to elaborate the natural gas costs in the future. And the second question was regarding the LNG importation business. So I know there will be a time line in the LNG price. So recently speaking, the crude oil price increase. So I would like to know if the LNG business will suffer losses in the future. Thank you.

[Unknown Executive]

[Interpreted] And the company always focused on our natural gas business. And it was also our major strategy in our E&P segment. So currently speaking, the natural gas, the all-in cost of natural gas was around CNY 5 per cubic meter, and we will also have a future plan for our natural gas production volume. So I would like to see that along with the volume increase, I think the unit cost of natural gas will also decrease and diluted. So for the 2021, our natural gas production plan was around 34 BPM. And for 2022, the target was around 38 BPM and the number was around 42 BPM in 2023. And we will also have future plans for our unconventional debt; that is, the shale gas. So in this year, our shale gas production plan was around 10.6 BCM. And I believe that the shale gas volume growth rate in the future will be between 6% to 10%. And maybe in 2022, the production volume of shale gas will be around 12 BCM to 12.5 BCM. As well as for the cost for shale gas, I think that the shale gas -- the cost of shale gas in the future will be lower than the current level. Thank you.

[Unknown Executive]

[Interpreted] So I would like to take your questions, which was regarding the importation of LNG importation business. So in the first quarter, the company -- the total imported LNG volume of in Sinopec was around 5.3 million tonnes. And we procure the LNG from the long-term contracts and from the spot market. So for the whole year speaking, the LNG importation volume would like to will be around 17.4 million tonnes. And the sources also will be from the spot market as well as the long-term contract.

We'll always pay attention to the natural gas value chain construction to fulfill the market demand and to -- and we will take the market price as well as the domestic natural gas demand and some other key factors into consideration to optimize our -- the pace of our natural LNG importation business as well as to increase our LNG business, the profit of the LNG business in the next few quarters.

[Unknown Executive]

Okay. Thank you again for attending Sinopec's announcement and your continued support. If you have any further questions, please contact our Board Secretary and IR people within Beijing, Hong Kong and [ Hilson ]. That concludes today's announcement. Thank you.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]