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Sinopec to Cut Costs, Expand Overseas as Refining Profit Falls

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    Sinopec to Cut Costs, Expand Overseas as Refining Profit FallsMarch 27, 2011, 12:13 PM EDT   By Bloomberg News
    March 28, 2011 (Bloomberg) — China Petroleum & Chemical Corp., Asia’s biggest refiner, will cut costs and accelerate its expansion overseas as government price controls prevent the company from passing on higher crude-oil costs to customers.
    Profit rose 14 percent to a record 71.8 billion yuan ($11 billion) last year, the company known as Sinopec said yesterday. Net income missed analysts’ estimates and trailed behind Cnooc Ltd.’s 85 percent growth and PetroChina’s 35 percent increase.
    A 51 percent gain in crude costs and higher operating expenses cut Sinopec’s refining profit by 13 percent. The Beijing-based refiner, which bought its first overseas oilfield stake in 2010, said it plans to expand globally in the next five years to reduce dependence on domestic fuel sales.
    “Sinopec underperformed among its domestic peers because of its bigger exposure to the refining business whose margins are controlled by the state,” Shi Yan, an analyst at UOB-Kay Hian Ltd., said by phone from Shanghai. “Sinopec may want to expand its upstream exploration segments, including the development and acquisition of oilfields overseas, to counter the negative impact of high crude oil costs.”
    The refiner said in March last year it would pay its parent China Petrochemical Corp. $2.5 billion for a share of an Angolan asset to help offset the “challenges” in the refining business, in its first acquisition of an oilfield stake outside China.
    This month, Sinopec signed an agreement with Saudi Arabian Oil Co. to take a 37.5 percent stake in a refinery in Yanbu as the company known as Saudi Aramco expands oil-processing capacity to meet domestic fuel demand.
    Chinese Fuel Demand
    Sinopec advanced 24 percent in Hong Kong trading in the past year, compared with the 9.1 percent gain in the benchmark Hang Seng Index. The stock rose 1.3 percent to HK$7.85 March 25.
    Fourth-quarter profit fell 22 percent from the previous three months to 15.4 billion yuan, according to calculations made by subtracting third-quarter earnings from the full-year net income. Huang Wensheng, the Beijing-based spokesman for Sinopec, didn’t reply to three phone calls seeking comment.
    Sinopec, which gets 62 percent of its revenue from producing and selling fuels, didn’t give fourth-quarter figures in its earnings statement and revised its 2009 profit to 63.1 billion yuan from 61.8 billion yuan. The mean estimate of 15 analysts for 2010 net income was 72.5 billion yuan.
    Oil processing volumes rose 13 percent in 2010 to 211 million metric tons as China’s economy grew at the fastest pace in three years, spurring demand for energy. Sinopec expects to refine 222 million tons of crude this year, according to the statement.
    Government Price Controls
    China, Asia’s biggest oil consumer, controls fuel prices to curb inflation. The government raised tariffs three times last year, by less than 5 percent each time, and cut once, while average crude prices increased 28 percent in New York compared with 2009.
    Consumer prices rose 4.9 percent in February from a year earlier, exceeding China’s 2011 target for a fifth month. The state last increased fuel prices on Feb. 21, by as much as 4.6 percent, after crude surged above $100 a barrel on concerns that anti-government protests in the Middle East and North Africa would disrupt supplies.
    Based on a mechanism introduced in December 2008, the National Development and Reform Commission, China’s top economic planner, can revise fuel prices when oil costs change by more than 4 percent over 22 working days. Crude fell 0.2 percent in New York on March 25 to settle at $105.40 a barrel.
    Parent’s Assets
    In October, Sinopec’s parent agreed to pay $7.1 billion for a 40 percent stake in Repsol YPF SA’s Brazilian unit to help meet Chinese demand. China Petrochemical and Spain’s largest oil company are in talks on joint ventures around the world after the investment, Repsol said on Jan. 4.
    Sinopec’s parent said in December it would buy Occidental Petroleum Corp.’s Argentine oil and gas unit for $2.45 billion, marking the company’s first investment in the Latin American country. The acquisition took Chinese bids for overseas energy assets to a record $38.8 billion last year, according to data compiled by Bloomberg.
    –Wang Ying. With assistance from Paul Gordon and John Duce in Hong Kong. Editors: Ryan Woo, Amit Prakash.  To contact the reporters on this story: Wang Ying in Hong Kong at Ywang30@bloomberg.net .To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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