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Chinese oil majors show momentum, aided by pipeline sale

Sinopec regains pre-COVID profits, while coal sales rebound in September

Sinopec quadrupled profit in the July-September quarter, buoyed by sales of oil and gas pipelines.   © Reuters

HONG KONG -- Major Chinese energy companies show signs of recovery in their third-quarter results, as rising domestic demand helped propel a rebound from the coronavirus pandemic.

China Petroleum & Chemical, or Sinopec, nearly quadrupled its July-September net profit on the year, jumping to 46.38 billion yuan ($6.91 billion). Much of the increase came from selling oil and gas pipeline assets at the end of September to China Oil & Gas Pipeline Network, a new state-owned enterprise known as PipeChina.

The sale lifted net profit by 30.8 billion yuan and raised earnings before interest and taxes, or EBIT, by 31.8 billion yuan, Shou Donghua, Sinopec's chief financial officer, said during the online earnings briefing on Thursday.

Even without this one-off gain, Sinopec was able to increase third-quarter net profit on the year. The oil company's disclosure of EBIT without the pipeline deal totaled 30.16 billion yuan, up 37% from a year ago.

Though lower oil prices influenced the upstream exploration and production segment, profit in the refinery segment rose by almost 13 billion yuan thanks to "the recovery of domestic demand in the third quarter," Chairman Zhang Yuzhuo said in a statement.

A PetroChina gas station in Jiangsu province. A PetroChina official said the company is "now seeing encouraging signs of recovery."   © Reuters

Adjusting the product mix to fit current needs -- including shifting to more asphalt, lubricant and other marketable items -- let Sinopec boost refinery throughput for the July-September period by 11.0% quarter-on-quarter and 1.9% on the year. Supply of chemical feedstock increased by 5.3% from a year ago, which mainly provided for the company's own chemical segment.

The chemical segment's profit did not fully recover to the year-earlier level, but the production volume of ethylene, the most basic chemical product, rebounded to only 2% below last year.

"In the third quarter, all of our chemical facilities operated at a quite high utilization rate," Sinopec Vice President Huang Wensheng said on Thursday. "We see continued tight supply, so we are quite confident for the chemical [segment's] fourth quarter and the first half of the year to come."

Similarly, PetroChina reported net profit of 40.05 billion yuan for the third quarter on Thursday, four and a half times higher than in the year-earlier period. PetroChina made a larger contribution to PipeChina than its peer, as the sale added 45.82 billion yuan to pretax profit and 32 billion yuan to profit after taxes.

Unlike Sinopec, PetroChina's third-quarter profit would not have risen on the year without the sale. But the company's net profit outside of the deal reached roughly 8 billion yuan, or 9% below the year-ago level for a sequential rebound.

"The company made great progress in the third quarter," Wei Fang, head of investor relations at PetroChina, said at an online analysts' call on Friday. "We are now seeing encouraging signs of recovery -- production and day-to-day operations are gradually returning to normal," he added.

Both Sinopec and PetroChina recorded their first net losses as listed companies for the first half of the year, with combined losses of 52.86 billion yuan. The pipeline deals lifted their nine-month results to positive territory. But even without the sales, the pair of state-owned companies made aggregate net profit of about 24 billion yuan for the July-September quarter.

China's coal miners, another pillar of the country's energy sector, are feeling the recovery as well. China Shenhua Energy, the largest coal producer in the world, reported third-quarter net profit of 12.9 billion yuan, up 0.5% from a year ago.

"In the third quarter, the economic recovery led to the growth of coal demand," Huang Qing, the company's secretary to the board, said in a statement on Monday.

"The earnings were ahead of our expectation," Lawrence Lau, analyst at BOCI Research, said on Tuesday. He maintained a "buy" rating, while upgrading the earnings forecast until 2022.

The recovery in coal demand is vivid in the monthly operation data. Shenhua's coal sales totaled 40.2 million tons in September, up 8.6% on the year. Lau revised the full-year sales forecast upward to 422 million tons, about 5% more than the company's guidance of 403 million tons.

Smaller competitors make the trend even clearer. China Coal Energy sold 26.4% more in September than a year ago. Yanzhou Coal Mining, which discloses only a quarterly figure, lifted such sales volume by 26.1% for the July-September period.

The recent rebound drove China's raw coal production for the first nine months of 2020 to 2.79 billion tons. The year-on-year decrease stands at 0.1%, almost on par with pre-coronavirus levels in 2019.

But the recovery is not in full swing, as oil and coal prices remain weak -- especially for oil producers. The top line for Sinopec and PetroChina fell 29% and 20%, respectively, during the third quarter. Peer CNOOC, which did not disclose its third-quarter profit, said quarterly revenue dipped by 28% year-on-year, due mainly to a 29% drop in average oil prices from a year ago.

The Hong Kong market seems to reflect this issue, as share prices of the three Chinese oil majors have dipped 30% to 43% year to date, underperforming the wider Hang Seng Index, which has dropped by over 10%.

Even analysts who rate these oil companies positively cite the risk of the global economy staying cold. Wu Yu at Everbright Securities reiterated his "buy" rating for Sinopec on Thursday but warned of "continued downward risk on crude oil price" going forward.

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