Summary: We are maintaining our Neutral recommendation on Sinopec ADRs. The company, which is one of the largest integrated energy companies in China, witnessed an increase of more than 8% in total oil and gas production during the nine months ended Sep 30, 2014. However, owing to a decline in crude oil prices and rising operating expenses during this period, Sinopec's profits from its all-important upstream operations fell from the year-ago period. We also believe that Sinopec's matured domestic oil fields and associated rising costs will remain an overhang on its operations. Given these factors, we prefer to stay on the sidelines in the near term.
Overview: China Petroleum and Chemical Corporation (SNP or Sinopec), with its head office in Beijing, China, is one of the largest petroleum and petrochemical companies in Asia. The company is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. The company is also the largest producer and distributor of petrochemicals in the nation. China Petrochemical Corporation (or the Sinopec Group), a state-owned enterprise, owns a 75.84% stake in Sinopec. The company operates in four business segments Exploration and Production (E&P), Refining, Marketing and Distribution, and Chemicals.
Sinopec's exploration and production activities are primarily located in mainland China. Total production in 2013 was 442.8 million billion barrels of oil equivalent, of which crude oil volumes were 332.5 million barrels and natural gas volume was 660.2 billion cubic feet. As of December 31, 2013, the company's proven reserve of crude oil and natural gas was 3,130 million barrels and 6,520 billion cubic feet, respectively.
For the refining segment, throughput amounted to 231.95 million tons in 2013, representing a year-over-year increase of 4.8%. Oil products volume increased 5.6% year over year to 140.4 million tons.
The company's marketing and distribution segment offers enhanced customer service, reinforces quality control, expands sales volume and provides customers with premium oil products.
Sinopec's chemical operations include manufacturing and marketing of a range of chemicals for industrial use. Sinopec's six major categories of chemical products are basic organic chemicals, monomers and polymers for synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical fertilizer. In 2013, the company produced 9.98 million tons of ethylene, reflecting a year-over-year increase of 5.6%. Sales volume of chemical products increased 7.6% over 2012 to reach 58.82 million tons.
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