Sinopec was dragged down by the chemical business

On April 29, Sinopec released its first quarter report for 2024 and held a performance briefing. Following the overall decline in performance last year, Sinopec's revenue and net profit in the first quarter once again showed a downward trend, and the problem still lies in the chemical business.

Sinopec said that although the domestic demand for natural gas grew rapidly, the demand for refined oil maintained growth, and the demand for chemical products accelerated year-on-year, the gross profit of the chemical industry was still at a low level due to the continuous release of new production capacity and the rising cost of raw materials.

As of the lunch break on April 30, Sinopec's A-share share price was 6.39 yuan per share, up 2.08%, with a total market value of 777.9 billion yuan, and H-share share price was at 4.78 Hong Kong dollars per share, up 2.36%, with a total market value of 581.9 billion Hong Kong dollars.

The chemical business continued to be sluggish

According to the financial report, Sinopec achieved operating income of 789.967 billion yuan in the first quarter of 2024, a year-on-year decrease of 0.2%, the first quarterly revenue decline since 2021, and a net profit attributable to shareholders of the parent company of 18.316 billion yuan, a year-on-year decrease of 8.9%.

In terms of business, Sinopec achieved steady growth in exploration and development, refining, marketing and distribution, but the chemical business still suffered losses.

In terms of exploration and development, Sinopec produced 129 million barrels of oil and gas equivalent in the first quarter, up 3.4% year-on-year, of which natural gas production was 350.46 billion cubic feet, up 6% year-on-year. EBIT of the Exploration & Development segment was RMB14.823 billion. In the refining sector, Sinopec completed the processing of 63.3 million tons of crude oil in the first quarter, a year-on-year increase of 1.7%, and produced 38.83 million tons of refined oil, a year-on-year increase of 4.1%. EBIT of the refining segment was RMB6.887 billion. In terms of marketing and distribution, Sinopec's total sales volume of refined oil products in the first quarter was 59.81 million tons, a year-on-year increase of 6.5%. EBIT in the Marketing & Distribution segment was $8,678 million.

In terms of chemical business, the company's ethylene output in the first quarter was 3.279 million tons, and the total operation of chemical products was 19.51 million tons. EBIT in the Chemicals segment was -1,609 million yuan. Regarding the loss of the chemical business, Huang Wensheng, vice president and secretary of the board of directors of Sinopec, said at the performance briefing that in the first quarter, international crude oil prices fluctuated upward, and the prices of raw materials such as naphtha rose, but the contradiction between supply and demand in the chemical market continued, and the price increase of chemical products was not as high as the increase in raw material costs, and the gross profit of the chemical business was sluggish.

In fact, Sinopec's chemical business crisis has long been apparent. According to the 2023 performance report, Sinopec achieved revenue of 3.21 trillion yuan last year, down 3.2% year-on-year, and net profit attributable to the parent company was 60.46 billion yuan, down 9.9% year-on-year. Among them, the external sales revenue of chemical products was 411.4 billion yuan, accounting for 12.8% of the company's turnover and other operating income, a year-on-year decrease of 8.6%, which was mainly due to the decline in sales volume and price of most chemical products.

At the 2024 Petrochemical Industry Development Conference held recently, Sun Weishan, vice president of the China Petroleum and Chemical Industry Federation, said, "The prices of crude oil, natural gas and most of their petrochemical products have fallen sharply, resulting in 'increasing production and sales without increasing profits' in the petrochemical industry in 2023." "The prices of major bulk petrochemical products fell last year, among them, propylene, PTA, methanol, ethylene glycol, caprolactam, polypropylene, polyvinyl chloride, butyl rubber and calcium carbide for two consecutive years "production loss".

In the face of the embarrassment of the company's chemical business, Huang Wensheng said that the company will closely follow the changes in the chemical market, continue to promote the diversification of raw materials, reduce the cost of raw materials, closely connect production and marketing, adjust the product structure in a timely manner, and improve the ability of high-quality assets to create efficiency, continue to increase the development of new materials and high value-added products, expand the space for efficiency, continue to strengthen cost control, further enhance cost competitiveness, and strive to turn losses into profits.

Looking forward to the chemical market situation throughout the year, Sinopec believes that since the second quarter, as China's economy continues to grow well, and a series of policies to stabilize the economy and promote growth, the overall consumption of automobiles, home furnishings, electronic products and other products is improving, which is conducive to the demand of the chemical market.

It is worth mentioning that on the same day as the release of the financial report, Sinopec also issued the "Announcement on the Resolution of the 22nd Meeting of the Eighth Board of Directors of China Petroleum & Chemical Corporation", which involved three personnel appointments: first, Yu Baocai resigned from the post of president of Sinopec and was reappointed as "senior vice president"; second, Zhao Dong, general manager of Sinopec Group, was appointed as president of Sinopec; and third, Wan Tao, deputy general manager of Sinopec Group, was appointed as senior vice president.

Some industry insiders pointed out that the two important personnel appointments announced by the company were directly taken over by the current senior management of Sinopec Group, or there may be consideration of increasing Sinopec's business management.

Oil price volatility continues

As a petrochemical giant, Sinopec has played a stable role in the oil and gas sector and the refining sector, but risks remain.

From the perspective of capital expenditure, the capital expenditure in the first quarter was 20.5 billion yuan, mainly concentrated in the above two sectors. Among them, the capital expenditure of the exploration and development sector is 13.5 billion yuan, which is mainly used for the construction of crude oil production capacity such as Jiyang and Tahe, the construction of natural gas production capacity in western Sichuan, and the construction of oil and gas storage and transportation facilities such as Longkou LNG. The capital expenditure of the oil refining sector was 4.1 billion yuan, mainly used for the construction of Zhenhai expansion, Guangzhou and Maoming technological transformation projects, the capital expenditure of the marketing and distribution sector was 600 million yuan, mainly for the development of comprehensive refueling station network, the transformation of the existing terminal sales network, and the construction of non-oil business, the capital expenditure of the chemical sector was 2.1 billion yuan, mainly for the construction of Zhenhai Phase II ethylene and Maoming ethylene projects, and the headquarters and other capital expenditure of 200 million yuan were mainly used for the construction of scientific and technological research and development, informatization and other projects.

However, since the beginning of the year, the international oil market has been turbulent, according to data compiled by the Financial Times, as of early April, Brent crude oil prices have risen by 18.3% this year, and WTI prices in the United States have risen by 21.2% this year.

Xue Jinlei, an energy analyst at the business community, told the International Financial News that Brent crude oil prices are expected to remain at a high level around $90 per barrel this year, which is the result of the current supply and demand game. Against the backdrop of OPEC production cuts and ongoing geopolitical conflicts, the supply side is likely to remain positive, but there is uncertainty about the future economy, and demand growth may slow down. In addition, new energy sources are having an impact on traditional energy sources and replacing them, but they may be reflected in a longer-term process.

In this context, how to make good use of derivatives tools to manage the risk of oil price fluctuations and maintain stable refining gross profit is of great significance to the operation of petrochemical enterprises. According to the first quarterly report, Sinopec's derivative financial assets decreased by 40.8% in the first quarter over the same period last year, and derivative financial liabilities increased by 72.2% over the same period last year. In addition, the company's hedging business has a floating loss of more than 4.8 billion yuan.

Some investors questioned at the performance briefing, and Sinopec responded that the financial derivatives purchased by the company were for the purpose of hedging, mainly to avoid the risk of fluctuations in the prices of crude oil, refined oil and other commodities. In 2024, the company carried out commodity financial derivatives business in accordance with the annual plan of financial derivatives business approved by the board of directors, and the related business met the regulatory requirements of financial derivatives business, operated in a standardized manner, and achieved the goal of stabilizing price fluctuations and preventing market risks. Considering the situation of the physical and paper cargo ends, the hedging business has achieved good results and produced positive benefits on the company's performance.

The reporter noted that in December 2018, United Petrochemical, a wholly-owned subsidiary of Sinopec, was exposed to huge losses due to crude oil futures trading. In January 2019, Sinopec announced more details, saying that "in the course of daily supervision, the company found that the financial indicators of the hedging business of United Petrochemical were abnormal, and some losses were incurred due to the decline in oil prices in the course of some crude oil transactions".

Launched the Green Enterprise Action Plan 2.0

In its quarterly report, Sinopec also said it would launch the second phase of its green corporate action plan. It is understood that in April 2018, Sinopec launched the Green Enterprise Action Plan, an action plan for the creation of green enterprises in the whole industry chain. As of 2023, the five major goals and 25 key tasks identified in the first phase of the green enterprise action plan have been fully completed.

According to the announcement, in order to build a green production system and forge green competitiveness, Sinopec has formulated the "Sinopec Green Enterprise Action Phase II Plan". Focusing on the four aspects of carbon reduction, pollution reduction, efficiency improvement and greening, the company has formulated the following main action goals with 2028 as the time node: carbon emission intensity and methane emission intensity will be reduced by 5% and 20% respectively compared with 2023, 2.5 million tons of carbon dioxide will be captured and utilized per year, 600 carbon neutrality demonstration projects will be built, and the carbon compliance rate will be 100%, the comprehensive utilization rate of industrial solid waste will reach more than 92%, the standardized disposal rate of hazardous waste will be 100%, and the comprehensive energy consumption of 10,000 yuan output value will be reduced by 5% compared with 2023 The sewage reuse rate reaches more than 60%.

Under the "dual carbon" goal, Sinopec also focuses on the field of hydrogen energy and accelerates the deployment of new energy business. According to Sinopec's 2023 Sustainability Report, as of 2023, the company has developed a total of 128 hydrogen refueling stations, becoming the world's largest single hydrogen refueling station operator, accounting for about 40% of the country's supply, and the hydrogen refueling capacity is 34.71 million tons, an increase of 100% year-on-year.

According to the first quarterly report, the company is actively promoting the development of charging and swapping business, steadily promoting the demonstration application of hydrogen transportation, transforming into a comprehensive energy service provider of "oil, gas, hydrogen and electric services", and continuously improving the quality and efficiency of non-oil business operations.