China Petroleum & Chemical Corp

SSE:600028

Earnings Call Transcript 2021-Q3

[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 third quarter of 2021. Please be reminded that the results presentation for the third quarter of 2021 can be downloaded at www.sinopec.com. [Operator Instructions] Now I would like to transfer the call to Mr. [ Zhang Jung ], Head of Board Secretary of Sinopec Corp. Mr. Zhang, you may begin.

[Unknown Executive]

Thank you, Jane. Good morning, ladies and gentlemen. Welcome to Sinopec Q3 results announcement, and thank you for joining us today. This meeting is attended by Mr. Huang Wensheng, Vice President and Secretary to the Board; Mr. [ Sun Jung Go ], Deputy Head of Finance Department; and Madam [ Didi ], Deputy Head of Operation Management department. First, I would like to give the floor to Mr. Chen Yang, Deputy Head of Board Secretary to present to you the performance of Q3. Mr. Chen, please.

[Unknown Executive]

Thank you, Mr. Zhang. Good morning, ladies and gentlemen. Firstly, I will brief on our third quarter results. In the first 3 quarters, China's GDP grew by 9.8% year-on-year. International crude oil prices kept growth. Domestic demand for natural gas continues to grow rapidly with our parent consumption up by 16.6% year-on-year. Domestic demand for refined oil products recovered steadily and the demand for major chemicals sustained growth. Confronted with the environment where the international oil price went up and the demand for petrochemical products recovered steadily, the company is stressed on improving our system, expanding markets and controlling costs and eventually achieve good results.

EBIT of the first 3 quarters was CNY 102 billion up by 124% year-on-year and also 32% higher than the same period in 2019. Profit attributable to shareholders was CNY 60.7 billion, up by 149%. EPS was CNY 0.5. We kept optimizing debt structure and increased low-cost financing. Gearing ratio was 51.8%, maintaining our strong financial position. As of September 30, net assets attributable to shareholders of the company was CNY 768.4 billion, up by 3.6% compared with the beginning of the year.

In the first 9 months, the company enhanced management of inventory, receivables and payables and optimized the payment of bills. Net cash generated from operating activities was CNY 116 billion, up by 37.4%. Cash used in investing activities was around CNY 100 billion. Net cash used in financing activities was CNY 12 billion. In E&P sector, we continued to promote high-efficiency exploration and a profit-oriented development, consolidated resource base and increased production and profits. In terms of exploration, we strengthened risk exploration in new regions and in new sectors, which led to new discoveries in key business and major breakthroughs in continental facies shale oil exploration.

In terms of production, we enhanced the efforts in capacity building and output of major natural gas and crude oil products and the natural gas production increased by 13.7%. Realized price of crude in the first 9 months was USD 60.9 per barrel, up by 59% year-on-year. Natural gas was USD 6.7 per Mcf, up by 26.7%. Lifting cost was USD 16.2 per barrel. The EBIT of Upstream was CNY 10.9 billion, up by 37.6% year-on-year. In refining, the company actively responded to market changes, increased throughput, kept high utilization rate, actively adjusted product space and maximized profits along the industrial chain.

We optimized crude oil allocation and procurement costs. We insisted on the strategy of shifting from oil to chemicals, lowered refined oil products yield and increased production of light chemical feedstock. We increased production of higher value-added products and the specialties, built 6 sets of hydrogen purification units, developed high-end needle coke products and domestic market share of low sulfur bunker fuel rank the first.

In the first 3 quarters, the company processed 191 million tonnes of crude oil, up by 9.3% year-on-year. and produced 109 million tonnes of refined oil products, up by 3.2% year-on-year. The refining margin was USD 11.8 per barrel, up by 248%. Cash operating cost was USD 3.96 per barrel. EBIT of refining segment totaled CNY 54.3 billion, May turnaround and increased by CNY 56 billion.

In marketing, the company leveraged our advantage of integration to expand markets and adopted targeted marketing strategy, resulting in an increase of scale. We consolidated our resources of customers and marketing throughout the country and continuously improved the quality of our services. We optimized the network layout to reach end users, accelerated the construction of integrated energy service stations, offering petrol gas, hydrogen, power and nonfuel services and put our first carbon neutral station and the BIPV station into operation.

In the first 3 quarters, the marketing sector, the total domestic sales volume of refined oil products was 128 million tonnes, up by 3.8 year-on-year. The company strengthened the development and the marketing of branding merchandise, actively sped up the development of nonfuel businesses. Nonfuel business profit was CNY 3.4 billion, up by 10.8%. EBIT for the marketing segment was CNY 24.3 billion. In Chemicals, by adhering to following the market and centering on profit, the company sped up the advanced capacity building and structural adjustment. We fine-tuned chemical feedstock to reduce costs. We adjusted the structure of the facilities and optimized maintenance schedule to raise the utilization of profitable facilities. We enhanced integration of production, marketing and the research and then continuously increased the ratio of higher value-added products, raising the ratio of synthetic resin, synthetic rubber and the synthetic fiber by 1.4, 3.7 and 1.6 percentage points, respectively.

In the first 3 quarters, ethylene production reached 9.75 million tonnes, up by 10% year-on-year. By consistently optimizing the structure of feedstock products and facilities, we achieved a strong gross margin. Chemical segment EBIT was CNY 23 billion, up by 228% year-on-year. For CapEx, we kept improving investment management system and raising the quality and the efficiency of investment. The CapEx was CNY 89.7 billion in the first 3 quarters. CapEx for E&P was mainly for oil and gas capacity building and storage as well as transportation facilities construction.

In refining, we focus on construction of Shanghai and Anchun refining structural upgrading projects. CapEx for marketing was mainly for construction of petrol stations, integrated energy stations and logistics facilities. For chemicals, it was mainly for construction of [ Qinghai ] and Hainan projects. That's all for the presentation. Now we are pleased to take your questions. Thank you.

[Unknown Executive]

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

[Jane Liu]

[Operator Instructions]

[Operator]

The first question comes from Parsley of JPMorgan.

[Rui Hua Ong, analyst]

[Interpreted] There are 2 questions from JPMorgan. The first one is regarding the national government has proposed a policy on carbon neutrality. So I want to know the impact of the company and then what is the future policy or strategy of the company. And the second question is regarding the natural gas price escalation recently. So what is the impact on the company's LNG business? And what is the future strategy on the company's natural gas business strategy?

[Unknown Executive]

Thank you for your 2 questions. So for the carbon peak and then the carbon neutralities has been one of the major missions for the company, start from September of last year when the President Xi Jinping made such a commitment. And each of the business is working on their targets on their emissions and their execution plans, respectively. We are very pleased to find is that the central government give us some guidance, the national, the whole nation's -- these activities' objectives. So that is a guideline for the companies to roll out.

For our observations based on our business, we sell some of 50% of the gasoline diesel and jet fuels to the Chinese market and that is our part market share. And we -- from our operation, we fund the diesel part have been [ peaked ] out in the year 2017, and we expect that the gasoline may [ peak ] out at around 2025 or 2026. But we have seen the transition of the electrifications in the transportation area. Those are the battery electric vehicle. And from a longer-term perspective, the fuel cell cars can replace some of the use of the gasoline and the diesels.

So that is going to be a bit of stretch to our existing business, but it also provides a lot of opportunities for the companies. So up to now, the whole nation's capacity of refining is around some 900 million metric tons and then based on the guidance that is at hand, it's 1 billion. There's still some room, some -- but I personally don't expect that China may reach that capacity given some of the small [ deep wells ] refineries. They may knock down based on -- that's a severe situation. And even for my company, we do not have any interest to further increase all that capacity, and we do a lot of the upgrading of the existing facilities and even change some of our operations of some smaller refineries to some feedstock supplier of our chemicals and integrated those operations with our existing chemical facilities.

So in the refining side, we do not see a lot of threats, but we see a lot of the opportunity in those area, given that we have been upgrade of refining at a very pretty low cost, and we are leveraging the company, the logistics advantage, and management advantage produce better, cleaner burn of the fuels at a lower cost.

For the marketing business, it's going to be a threat. The threat [ major ] come from the transition. So we are now trying to do a lot of infrastructures to support those transitions. Likewise, we are now exploring the swap opportunities for the battery for the EV cars in our existing stations. And we also built some hydrogen filling stations in our stations to change the filling stations to be an integrated service stations, including serve not only the gasoline diesel, but we are going to add some of the gas, the natural gas, the hydrogens and the battery services.

For the chemicals, as you may know in China, the demand in the company is pretty strong. Even though our operations of the chemical is operated at full load, 100% at a higher capacity in this year, it's going to be a 12.5 million metric tons, but China still import some more than 40% of the chemical downstream products in China, and we have ambitious plans to building some new capacity in the upcoming 5 years to meet the strong market need in China, and we see a lot of opportunity there. And you can tell from our CapEx in this year, we have allocated more capacity in the chemical area.

So for the business, overall, we feel this carbon [ peak ] and the carbon neutrality is going to be a threat and going to be an opportunity. We see more opportunities for the companies. Thank you for that first question. The second question for the market -- for the natural gas, you are absolutely right that China is deficit in terms of the natural gas supply.

And in my company, we are -- we sell more than 60 billion cubic meter of the natural gas plant in this year, we expected. You can tell more than 50% come from our existing production and roughly 45% to 50% come from the imports. We -- today, the escalation of the natural gas have been raised a lot of pressure for the earnings in our natural gas business, and they took a lot of measures including hedging some of their trading and increased their long-term contract proportion. And even for the spot, they use a lot of hedging activities. And at some time, they negotiated with the downstream customers trying to pass on some of the higher costs to the customer.

And we believe from their activities, we feel they are -- they really did a great job. And it's going to be suffered loss in the -- for the input part. But good news is that from 2 days ago, the natural gas price internationally has declined a bit. Yesterday, the GK arm declined more than 10%. And similarly, the PPI also declined significantly. And we are supplying this part. We may seize the opportunities, trying hard to manage the cost escalations. Thank you very much.

[Operator]

The next question comes from [ Cai Xu ] of Morgan Stanley.

[Unknown Analyst]

[Interpreted] So there are 2 questions from Morgan Stanley. The first one is regarding the profit of the company. Chemical segment was down Q-on-Q season, so vertical was a little different from the performance of the third-party refineries in China. So I want to know the reason and actually please elaborate the reason. The second question is that the minority profit of -- the profit of the minority shareholders was also different on Q-on-Q speaking. So could you also please elaborate the reasons?

[Unknown Executive]

[Interpreted] So for the Chemical segment in the third quarter, the profit -- the realized profit was around CNY 2.6 billion and decreased around CNY 3.3 billion Q-on-Q speaking. So there are 2 main reasons. The first one is that impacted by the crude oil price escalation, the price of chemical feedstock also increased, so the margin between the chemical feedstock and the chemical product also increased for around CNY 160 per tonne, and this led to the profit decreased around CNY [ 2.2 ] billion. And the second reason is that we also arranged the facilities' maintenance to enhance the chemical segment, which increased the cost for around CNY 0.6 billion. Thank you.

Okay. So the company also reinforced the management of the tax. So this year, the income tax was -- so the income tax of the company for the first quarter -- for the first 3 quarters was up by 22%. And we had in the third quarter, the minority of the shareholders also kept the slide. Thank you.

[Operator]

The next question comes from Neil of Bernstein.

[Neil Beveridge, analyst]

Just a couple of questions. So picking up on the carbon neutrality question, the company is generating very strong free cash flow. You've got a cash balance of over RMB 200 billion. So most companies at this stage would start buying back their own stock, which is not something I expect you to do. But can you elaborate more on what opportunities you see to deploy this cash within low carbon businesses which are clearly going to be a significant part of energy growth as we head into the energy transition?

My second question is really around how you're seeing the fourth quarter. So we've seen reports of power shortages of China, gas shortages in China, and that's impacted some of the highly energy-intensive industries, including chemicals. We're also seeing a slowdown in the housing market. So can you comment a little bit about how you see this impacting the fourth quarter, particularly on the chemicals business?

[Unknown Executive]

[Interpreted] Thank you for your [ 3 ] macro questions, and you are absolutely right that we keep pretty strong cash flow of the company's operations by the end of the third quarter. And our -- we have more than CNY 200 billion cash in our balance sheet. So this is a significant amount. However, we also have quite a significant ambitious development plan for the [ 4 to 5 ] years' supply. And that we -- in that time, we are going to further increase or enhance of the foundation of the resources, including investment. A lot of investment will be allocated on the natural gas parts that will help the whole nations as well as China. The company change of our portfolio is that part to provide more cleaner burn fuels to fight against -- to be contributor in those natural neutralities initiatives. And in some time, we also will build several integrated chemical facilities in China to meet the domestic Chinese market need in the -- for those high-performance compounding materials in particular. And we -- in the next several years, you can tell our ethylene's production may grow by 8% annually. And apart from that, we also commit to some investment in those -- in the energy transition in the hydrogen part that will be also a significant part of this investment.

So this is -- those investments need the cash flow -- needed cash flow support. We expect in the next several years that companies will try to manage the stable cash flow to support that. At that moment, we do not have a buyback initiative, given that in the Hong Kong Stock Exchange as well as China stock exchange, they have a strict stimulations in that part and those initiatives are subject to the approval of the shareholders. So a lot of those cash will be allocated in our investment as few as to maintain a stable dividend payout. So that is the use of those cash. And we are very pleased to see this cash had been stable in the past 3 years, at those levels of 180 to 200, [ this is ] pretty challenging marketing situations.

The second question regarding the short of the power sort of the supply of the energy that occurred, start from the October, and you can tell those have placed lots of the business as well as the government tax [ imports on its own ] part and a lot of the policies and the activities related in those areas under the power shortage have been eventually lifted, and the shortage of coal, hiking of coal prices have been coming down a bit significantly in the past week.

So we can see those area will be -- although it's going to be tight, but I fully believe the market as well as plus the government can have proper mining results situation in China. And the funding in the chemical area and the current situation, that is still very in good shape. Just like previous questions, in the third quarter, saying, we have declined the EBIT contribution in the chemical side in comparing with the second quarter but we still deliver more than CNY 5 billion EBIT in that business.

And then in the fourth quarter, the feedstock cost will be -- is going to be high for the chemicals but the chemical products price today is still at a relatively high level. The margin, chemical margins, still be there in China, given that the demand continues very strong in the first 3 quarters. The demand for the chemical products grow by some 8%, is a significant year-on-year growth in terms of demand. So we are seeing the fourth quarter demand will be continuous, will be strong in that part, that going to help us to deliver a good result in the chemical area. Thank you.

[Operator]

The next question comes from Toby of Citibank.

[Toby Shek, analyst]

[Interpreted] So the question was from Citibank. So the first one is that considering the energy shortage, including the diesel shortage. So while the company also increased to optimize the slate of the production and to increase the output of the diesel in the future, especially in the 4Q. And in addition, I also noticed that the size of the direct sales of diesel also increased recently. So what is the impact on the company's performance?

[Unknown Executive]

[Interpreted] So the supply of diesel in domestic market was tight recently, especially in October. And we also take the countermeasures to compete with the current situation. And we also optimized the slate of the production to increase the output of diesel, and we will also decrease the exportation of diesel to increase the supply to the domestic market. And we also -- and we will take advantage of our integrated, and we will make the full use of integrated advantages to counter the current situation, and we are confident that we will achieve a better performance in the 4Q. Thank you.

[Operator]

Next question comes from Lawrence of BOCI.

[Lawrence Lau, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] Okay. There are 3 questions from the BOCI. The first one is that I've noticed that the operating profit in the marketing segment was down by more than 30%. So could you please elaborate the reasons? And could you also elaborate the outlook in the 4Q of this year? And the second question is that is there any inventory gains in the refining segment and could you elaborate the number? The third question is that did we also increase the selling price of natural gas in domestic market?

So the answer for the first question is that the operating profit in the third quarter of the marketing segment was around CNY 5.6 billion, and the increase -- and then decreased CNY 2.5 billion Q-on-Q speaking. And the major reason is that the inventory gains in the third quarter decreased to CNY 1.3 billion Q-on-Q speaking. And the second question, the second reason is that impacted by the COVID-19 pandemic upgrade and also the flood disasters in some provinces, the throughput of the refined the sales volume of refined oil products decreased for around [ 2,860,000 points ] and this decreased the profit for around CNY 1.1 billion.

Okay. For the second question, my answer is that in order to maintain the solid, stable operation, the company normally keep the inventories up, crude oil and the refining products at the 20 days process volume level and 15-day level, respectively. So in the first 3 quarters due to the increasing of crude oil price, the inventory seen was around CNY 32.4 billion, including the Refining, Marketing and Chemicals segments and increasing for around CNY 63.1 billion compared with the same period of last year. And the number for the third quarter was CNY 7.1 billion, including the marketing coming through refining and chemical segment. Thank you.

And as for the third question is that the company always focus on the sales price of the natural gas. And for the first 3 quarters, the price of natural gas was -- the sales price of natural gas was up by around 17.4% and currently speaking, the domestic market was into the peaking season, especially in the winter season. And we anticipate that in the 4Q, the price of natural gas will be up by 20%.

[Unknown Executive]

Due to time constraints, now we have last 2 questions.

[Operator]

Due to time constraints, we invite last investors to ask questions. The last question comes from [ Lu Chang ] of CICC.

[Unknown Analyst]

[Interpreted] So there are 2 questions from CICC. So the first one is regarding the new material business of the company. So could you elaborate the EVA capacity currently and the future strategy on the EVA business? And the second question is that the company has some other new material business strategy?

[Unknown Executive]

[Interpreted] Thank you for your question. So currently, we have around 360,000 tonnes of capacity for EVA and for the EVA and for the capacity of EVA use in the photovoltaic generation was around 160,000. And there are also -- there are those 2 projects will come to in the next year, which is [Foreign Language]. So at that time, the total EVA for photovoltaic generation will be well reached around 560,000 tonnes.

And for your second question, I would like to say that the company will always focus on the new material business construction and development, and we will focus on the construction capacity construction on new high-end materials including the [ POE ], the needle coke, the [ R element ] and as well as the high-end [ plastic ]. So I would expect that in the next 5 years, the new material business of the company will have -- will show a good performance and deliver sound results in the next 5 years. Thank you.

[Unknown Executive]

Thank you again for attending Sinopec's announcement and your continued support. If you have any further questions, please contact our Secretaries and IRP based in Beijing, Hong Kong and Houston. 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.]