China Petroleum & Chemical - Q3 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. This is Jane Liu of PRChina. Welcome everyone to Sinopec Corp's Earnings Conference Call for the Q3 2021. Please be reminded that the results of presentation for the Q3 of 2021 can be downloaded at www.sinopec.com. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you'd like to ask a question. Now, I'd like to transfer the call to Mr. Zhang Zheng, Head of Board Secretariat of Sinopec Corp. Mr. Zhang, you may begin.

Zhang Zheng (Head of Board Secretariat)

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. Song Zhenguo, Deputy Head of Finance Department, and Madam Li Li, Deputy Head of Operation Management Department. First, I would like to give the floor to Mr. Chen Yang, Deputy Head of Board Secretariat, to present to you the performance of Q3. Mr. Chen, please.

Yang Chen (Deputy Head of Board Secretariat)

Thank you, Mr. Zhang. Good morning, ladies and gentlemen. Firstly, I will brief on our Q3 results. In the first three quarters, China's GDP grew by 9.8% year-on-year. International crude oil prices kept growth. Domestic demand for natural gas continued to grow rapidly, with apparent consumption up by 16.6% year-on-year. Domestic demand for refined oil products recovered steadily, and 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 stressed on improving our system, expanding markets, and controlling costs, and eventually achieved good results. EBIT of the first three 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 4.5. We kept optimizing debt structure and increased low-cost financing. Gearing ratio was 51.8%, maintaining a sound financial position. As of September thirtieth, 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 nine 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 profit-oriented development, consolidated resource base, and increased production and the profits. In terms of exploration, we strengthened risk exploration in new regions and in new sectors, which led to new discoveries in key basins and major breakthroughs in continental 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 nine months was $60.9 per barrel, up 59% year-on-year. Natural gas was $6.7 per Mcf, up 26.7%. Lifting cost was $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 the throughput, kept high utilization rate, actively adjusted product slate, and maximized profits along the industrial chain. We optimized crude oil allocation and cut procurement cost. 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 specialties, built six sets of hydrogen purification units, developed high-end needle coke products, and domestic market share of low sulfur bunker fuel ranked the first.

In the first three quarters, the company processed 191 million tons of crude oil, up by 9.3% year on year, and produced 109 million tons of refined oil products, up by 3.2% year on year. The refining margin was $11.8 per barrel, up by 248%. Cash operating cost was $3.96 per barrel. EBIT of refining segment totaled 54.3 billion CNY, made turnaround and increased by 56 billion CNY. In marketing, the company leveraged our advantage of integration to expand the markets and adopted targeting, targeted marketing strategy, resulting in an increase of scale. We consolidated our resources of customers and the 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 non-fuel services, and put our first carbon neutral station and the BIPV station into operation. In the first three quarters, the marketing sector, the total, domestic sales volume of refined oil products was 128 million tons, up by 3.8% year on year. The company strengthened the development and marketing of branding merchandise, actively sped up the development of non-fuel businesses. Non-fuel business profit was 3.4 billion CNY, up by 10.8%. EBIT for the marketing segment was 24.3 billion CNY. In chemicals, by adhering to following the market and centering on profits, 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 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 three quarters, ethylene production reached 9.75 million tons, up by 10% year on year. By consistently optimizing the structure of feedstock, products, and facilities, we achieved a strong growth 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 three quarters.

CapEx for E&P was mainly for oil and gas capacity building and storage, as well as transportation facilities construction. In refining, we focused on construction of Zhenhai and Anqing refining structural upgrading projects. CapEx for marketing was mainly for construction of petrol stations, integrated energy stations, and logistics facilities. For chemicals, was mainly for construction of Zhenhai and Hainan projects. That's all for the presentation. Now we are pleased to take your questions. Thank you.

Zhang Zheng (Head of Board Secretariat)

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

Operator (participant)

Ladies and gentlemen, this concludes the prepared remarks for today, and we're now ready for questions. If you'd like to ask any questions, please press star one. To cancel your questions, press star two.

The first question comes from first line of J.P. Morgan. Please go ahead. Thank you.

[Foreign language] So, Wang Yuchen, for the Q4 and twenty twenty-two's natural gas import deficit, do you have any guidance?

Sinopec plans to how to reduce the natural gas supply cost in the long term. As far as I understand, actually, the company plans to maintain a 10%-12% annual growth in natural gas production over the next five years. So do we have any changes in this area? And also, how much will Sinopec's LNG imports and storage increase in the next five years? Thank you.

There are two questions from J.P. Morgan. 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 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? Thank you.

Huang Wensheng (VP and Secretary to the Board of Director)

Thank you for your two questions. So for the carbon peak and then the carbon neutrality has been one of the major missions for the company start from the September of last year when President Xi Jinping made such a commitment. And each of the business is working on their targets and their missions and their execution plans respectively. We are very pleased to find that the central government give us some guidance. The national, the whole nation's activities objectives, so that is like a guideline for the companies to realize. For our observations, based on our business, we sell some of 50% of the gasoline, diesel, and jet fuels to the Chinese market. That is our current market share.

We, from our operation, find the diesel part has peaked out in the year 2017, and we expect that the gasoline may peak out at around the 2025 or 2026. We have seen the transition of the electrification in the transportation area. Those are battery electric vehicle and, from long-term perspective, the fuel cell cars can replace some of the use of the gasoline and the diesel. That is going to be a bit of a threat to our existing business, but it also provides a lot of opportunities for the companies. Up to now, the whole nation's capacity of refining is around some 900 million metric tons. Based on the guidance, that is 1 billion.

There's still some room, but I personally don't expect that China may reach that capacity, given some of the small default refineries. They may knock down based on such a severe situation, and even for my company, we do not have any interest to further increase our capacity, and we do a lot of the upgrading of the existing facilities, and even change some of operations of some smaller refineries to some feedstock supplier of chemicals, and integrated those operations with our existing chemical facilities.

In the refining side, we do not see a lot of threat, but we see a lot of the opportunity in those area, given we have been upgrade of refining at a very pretty low cost, and we are leveraging the company's logistics advantage and man-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. 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 build some hydrogen filling stations in our stations and to change the filling stations to be integrated service stations, including serve not only the gasoline, diesel, but we are going to add some gas, the natural gas, the hydrogen, and the battery services. For the chemicals, as you may know, in China, the demand in the chemicals were pretty strong. Even though our operations of the chemicals 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 imports some more than 40% of the chemical downstream products in China, and we have ambitious plans to build some new capacity in the upcoming five years to meet this, the strong market need in China, and we see a lot of opportunity there. And you can tell from our capacity 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 the first questions. The second questions, for the market, for the natural gas, you are absolutely right. The China is deficit in terms of the natural gas supply.

In my company, we sell more than 60 billion cubic meter of the natural gas per annum. In this year, we expected you can tell more than 50% come from our existing production, and roughly 45%-50% come from the imports. Today, the escalation of the natural gas has been bringing 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 increase their long-term contract proportion. And even for the spots, they use a lot of hedging activities, and at some time, they negotiate with the downstream customers, trying to pass on some of the higher costs to the customer.

We believe from their activities, we feel they really did a great job. It's going to be suffer loss in the for the import part. But the good news is that from the two days ago, the natural gas price internationally has declined a bit. Yesterday, the JKM declined more than 10%, and similarly, the TTF also declined significantly. We are supplying this part. We may see the opportunities, try hard to manage the cost escalations. Thank you very much.

Operator (participant)

The next question comes from Kelly Xu of Morgan Stanley. Please go ahead. Thank you.

Jack Xu (Analyst)

Hello, good morning, then congratulations to the company for achieving good results this time, then I have two questions I want to ask. One is about finances. That is, we see that actually in the Q3, its refining segment, no, the chemical segment, if we look at it year-on-year and quarter-on-quarter, its EBITDA actually fell by about 57%. This actually differs from what we see in other domestic companies' earnings calls and market trends, because their profitability is still relatively good on a year-on-year basis, so I would like to ask what the reason for this is, then another question is about the company. For example, these tax matters, the tax rate, and some of the other items, including minority shareholder rights.

It seems that compared to the previous year on a year-on-year basis, the proportion has changed, and it seems a little different from before. So I would like to ask Mr. Huang Wensheng if there is any specific reason for this? Thank you.

There are two questions from Morgan Stanley. The first one is regarding the profits of the company's chemical segment was down Q on Q basis, so which was a little different from the performance of the third party's refineries in China. I want to know the reason, and please elaborate the reason. The second question is that the profit of the minority shareholders was also different on Q on Q basis. Could you also please elaborate.

Huang Wensheng (VP and Secretary to the Board of Director)

So for the chemical segment in the Q3, the realized profit was around CNY 2.6 billion, and decreased around CNY 3.3 billion Q on Q speaking. So there are two millions. The first one is that impacted by the crude oil price escalation, the price of feedstock, of chemical feedstock also increased. So the margin between the chemical feedstock and the chemical product also increased for around CNY 160 per ton. And this lead to the profit decrease around CNY 2.2 billion. And the second reason is that we also arranged the facilities, the maintenance, to enhance the chemical segment, which increased the cost for around CNY 0.6 billion. Thank you.

Song Zhanguo (Deputy Head of Finance Department)

Next question now.

Huang Wensheng (VP and Secretary to the Board of Director)

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 three quarters was up by 22%. And in the Q3, the minority of the shareholders also kept slight. Thank you.

Operator (participant)

The next question comes from Neil of Bernstein. Please go ahead. Thank you.

Neil Beveridge (Managing Director)

Thank you very much. Just a couple of questions. So picking up on the carbon neutrality question, you know, the company is generating very strong free cash flow. You've got a cash balance of over 200 billion RMB. 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, you know, low carbon businesses, which you know, are clearly going to be, you know, a significant part of, you know, energy growth as we head into the energy transition? My second question is really around how you're seeing the Q4.

You know, we've seen reports of power shortages in China, gas shortages in China, and that's impacted you know some of the highly energy-intensive industries, including chemicals. We're also seeing a slowdown in the housing market. Can you comment a little bit about how you know you see this impacting you know the Q4, particularly on the chemicals business? Thank you.

I got one question here from Neil. The first one is,

Huang Wensheng (VP and Secretary to the Board of Director)

Thank you for your pretty macro questions. You are absolutely right, and we are keep pretty strong cash flow of the company's operations by the end of this Q3. We have more than CNY 200 billion cash in our balance sheet. So this is a significant amount. However, we also have quite a strong, significant and ambitious development plan for the 14th five-year plan. In that plan, we are going to further enhance the foundation of the resources, including investment.

A lot of investment will be allocated on the natural gas parts that will help the whole nation, as well as China, the company change our portfolio in that part and to provide more cleaner burn fuels to fight against to be a contributor in those carbon neutrality initiatives. In some time, we also will build several integrated chemical facilities in China to meet the domestic Chinese market need for those high performance compounding materials in particular. So, in the next several years, you can tell our ethylene production may grow by 8% annually. Apart from that, we also...

The strong investment in those, in the energy transition, in the hydrogen part, that will be also a significant part of the investment. So, the, this is, those investment need the cash flow, need the cash flow support. We expect, in the next several years, the company to try to manage the stable cash flow to support that. And at the moment, we do not have a buyback initiative given, in the Hong Kong Stock Exchange as well as China Stock Exchange. They have a strict regulations in that part, and those are initiatives subject to the approval of the shareholders.

A lot of those cash will be allocated in our investment. As we use to maintain the stable dividend payout. That is the use of those cash. And we are very pleased to see this cash has been stable in the past three years at those levels of 180-200 at this pretty challenging marketing situations. The second question regarding the shortage of power, shortage of the supply of the energy that occurred starting from October. And the...

You can tell lots of the business as well, the government taxing policies on part, and a lot of the policies and the activities relating those area and the power shortage have been eventually lifted. And the shortage of coal, hiking of coal price, 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 be proper manage those situation in China. And for the in the chemical area and the in current situation, that is still very in good shape.

Just like previous questions, in Q3, saying we have declined the EBIT contribution in the chemical side in comparison with the Q2, but we still deliver more than five billion CNY EBIT in that business. And in Q4, the feedstock cost will be going to be high for the chemicals, but the chemical products price today is still at a relatively high level. The chemical margin still be there. And in China, given the demand is continuous, very strong. In the first three quarters, the demand for the chemical products grew by about 8%. It is a significant year-on-year growth in terms of demand.

So, we are seeing in the first 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 (participant)

The next question comes from Toby of Citibank. Please go ahead. Thank you.

Give out the opportunity. The question is, just to clarify, I just asked a question about personnel safety, that is, the shortage of gasoline. Because recently, I also saw that there are some tense situations appearing in the domestic diesel aspect. I want to know, because as the largest diesel producer in the country, in this Q4, will we adjust some of our refinery parts, maybe the ratio of materials, and then try to increase the diesel a little more? Also, and also, we have seen one recently, this diesel wholesale price has also risen relatively well.

I want to understand these two things, our diesel margin and this gas station's margin, what kind of impact will it have on the Q4? So this is the question, thank you.

So the question was from Citi, Citibank. So the first one is that, considering the energy shortage, including the diesel shortage, so, will the company also increase to optimize the slate of the production and to increase the output of the diesel in the future, especially in the four Q? And, in addition, I also noticed that the price of the direct sales of diesel also increased recently. So what is the impact on the company's performance? Thank you.

Li Li (Deputy Head of Operation Management Department)

Okay. First of all, thank you for asking this question. Let me answer it briefly first. So just like you said, recently, maybe we have also seen in various media the related energy in China, some supply and demand tight situations. So diesel in the recent.

So the supply of diesel in domestic market was high recently, especially in October. And we also take the counter measures to compete with the current situation, and we also optimize the split 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 will take advantage of our integrated, and we will make the full use of our integrated advantages to counter the current situation, and we are confident that we will achieve a better performance in the full year. Thank you.

Operator (participant)

The next question comes from Lawrence of BOCI. Please go ahead, thank you.

Lawrence Lau (Analyst)

Hi, hi.

Song Zhanguo (Deputy Head of Finance Department)

Okay, I will answer these few questions. First, to answer your question about the profit situation of the sales sector in the Q3. The operating revenue of the sales sector in the Q3 was CNY 56 billion. Quarter-over-quarter, it decreased by about CNY 25 billion. Actually, the main reasons are two aspects. One aspect is that in Q2, the oil price rise and the rise amplitude was higher than the Q3. So, its inventory contribution was not as good as the Q2. Here, it differed by CNY 13 billion. Second, the main reason is still the Q3. You know, the domestic local epidemic. And mainly, it is the Q3 flood disaster. Then, our finished oil operating volume quarter-over-quarter decreased by more than 2.8 million tons. It also reduced profit by about CNY 11 billion. This is the main factor of the impact on the sales sector in the Q3. Then, from Q4 perspective. It should be said that from the Q4, the entire September and October, especially October, the benefits are still good. Then, from November to December. From the current situation perspective, the Q4 operating revenue and the Q3 should differ not much. This is the first question.

OK, there are three 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 Q4 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?

The answer for the first question is that the operating profit in Q3 of the marketing segment was around 5.6 CNY and decreased 3.5 billion Q on Q speaking. The major reason is that the inventory gains in the Q3 decreased 1.3 billion CNY, Q on Q speaking. The second reason is that, impacted by the COVID-19 pandemic outbreak 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 thousand tons, and this decreased the profit for around 1.1 billion RMB.

To answer the second question, it should be said that the company has about 20 days of crude oil processing volume inventory for the guarantee of normal production and operation, and also about 15 days of finished oil inventory. So, the impact of inventory on the company's operating income is still very large. Because this year's oil price is presenting an upward trend, the contribution of inventory to the company is relatively large. For the first three quarters, the overall inventory profit increase is CNY 0.3- 2.4 billion. The Q3 you are concerned about is CNY 7.08 billion.

This Q3's overall inventory income is still less than the Q2's inventory profit increase. Because the Q3's overall oil price trend is a slow rise, the Q3's overall inventory is less than the Q2 by CNY 6.3 billion. This is also the main reason why the company's Q3 overall performance is slightly worse than the Q2. Thank you.

Okay, for the second question, my answer is that in order to maintain the stable operation, the company normally keeps the inventory of crude oil and refining products as twenty days processing volume level and fifteen days level respectively, so in the first three quarters, due to the increasing of crude oil price, the inventory gains was around CNY 32.4 billion, including the refining, marketing and chemical segment, and increasing for around CNY 63.1 billion compared with the same period of last year, and the number for Q3 was CNY 7.1 billion, including the marketing, refining and chemical segment. Thank you.

[Foreign language]

As for the third question, the company always focuses on the sales price of the natural gas. For the first three quarters, the sales price of natural gas was up by around 17.4%. Currently speaking, the domestic market is in the peaking season, especially in the winter season. We anticipate that in Q4, the price of natural gas will be up by 20%. Thank you.

Huang Wensheng (VP and Secretary to the Board of Director)

Due to time constraints, now we have last two questions. Thank you. Due to time constraints, we invite last investor to ask question.

Operator (participant)

The last question comes from Lu Chen of CICC. Please go ahead. Thank you.

[Foreign language]

There are two questions from CICC. The first one is regarding the new material business of the company. Could you elaborate the EVA capacity currently and the future strategy on the EVA business? The second question is that does the company has some other new material business strategy? Thank you.

Song Zhanguo (Deputy Head of Finance Department)

Thank you, Luchen. Now, our total capacity for EVA is 360,000 tons. The capacity for EVA used in photovoltaics is now 160,000 tons. In the future, on this EVA capacity, there is also a new construction plan. Currently under construction two sets of projects, one is Zhongke, for photovoltaic EVA, 100,000 tons, and another one is in Gulei, this photovoltaic EVA is 300,000 tons. In this way, by the second half of next year, our total capacity for photovoltaic EVA can reach 560,000 tons. In addition, the company, just now Mr. Huang also mentioned, we are in the chemical aspect, to focus on the research and production of new materials and other high value-added products.

Now the some large chemical projects planned, mainly is designed, mainly is to increase these products' output, like including POE, and also, our needle coke product in the refinery, as well as alpha-olefin, and high-end high-end resin, high-end chemical fiber, all are in the research and production process. In summary, the company will in new materials aspect, in the future five years, will have very good performance. We this is mainly in the anti-cyclical aspect, the company will do a large amount of work. Thank you.

Thank you for your questions. So currently we have around 660,000 tons of capacity for EVA and the capacity of EVA used in the photovoltaic generation was around 160,000.

And there are also two projects that will come on stream in the next year, which is Zhongke and Gulei. So at that time, the total EVA for photovoltaic generation will reach around 560,000 tons. 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 capacity construction on new high-end materials, including the POE, the needle coke, the alpha olefin, and as well as the high-end plastics. So I would expect that in the next five years, the new material business of the company will show a good performance and deliver sound performance results in the next five years. Thank you!

Zhang Zheng (Head of Board Secretariat)

Thank you again for attending Sinopec's announcement and your continuous support. If you have any further questions, please contact our Board Secretary and our people based in Beijing, Hong Kong and Houston. That concludes today's announcement. Thank you!