Part 1 Introduction
This report is a comprehensive analysis of the financial position of Sinopec as of 2015. Sinopec is the acronym for China Petroleum and Chemical Corporation. It provides oil and gas to the majority of cities in China. Headquartered in Beijing, China, the stock is listed in Hong Kong and it is one of the equities that made up the Hang Seng Index. The stock ticker is 2386.HK and it is also traded in Shanghai, New York and London. The firm has business operations in oil and gas exploration, refinery and distributions. It sales and produces petrochemicals, chemical fibres and chemical fertilizers. The firm is an import and export agency for crude oil and natural gas with its own pipelines and storage systems. Supported by the government, Sinopec is one of the largest firms in China and ranked Number 3 in the 2015 Fortune Global 500 ranking.
Over the years, the firm has expanded overseas from Asia to all over the world by mergers and acquisitions. For example, in as early as 2002, Sinopec entered Africa through a joint venture with Unipec in Gabon. In 2010, Sinopec acquired the Canadian oil sand firm Conoco Philips. In 2011, the firm entered South America by buying a 30% stake in Galp Energia, a Brazilian energy firm. In 2012, Sinopec purchased oil wells in Southern Nigeria and invested a 49% stake in Talisman Energy in the UK.
The report is made up economic analysis, financial analysis, and future prospects. The economic analysis section will talk about the general economic trend in China, where Sinopec’s business generates the most revenue. The financial analysis section will use ratios from the past four years and two of its largest competitor’s ratios to view the position of Sinopec financially. The future prospects section incorporated analysts’ forecasts on how the firm will perform in the future.
Part 2 Economic analysis
The GDP in China in history is shown in the following graph. According to this graph, the overall GDP in China is growing, though at a much slower rate than previous years. This slowing down of growth rate could negatively affect consumer’s purchasing power and therefore, decrease the demand for households requiring cars. The overall decrease in growth rate in GDP could also mean a decrease in industrial development speed, which will also negatively affect the demand for crude oil and the business for Sinopec. From the general economic trend, the growth rate for Sinopec will likely to decrease in the future.
As we all know, during 2015, due to the oligopoly oil market in the Middle East, crude oil prices dropped to one of the lowest levels observed in many years and it has significantly affected the oil firms. Before the summer of 2014, prices were relatively stable and stayed at around $100 per barrel. However, from mid-2014, the crude oil price started to drop and by the beginning of 2015, the oil price was around $50 per barrel. Then a small resurgence occurred before the price continued to drop down to the lowest level of around $20 in the beginning of 2016. During the past year, the price is rising back and has reached the $40-$50 level. The reason for this sudden drop is because strong APEC countries in the oil cartel such as Saudi Arabia wanted to control the market and further drive out its competitors---the weaker countries in the APEC. Once the countries that depend more heavily on oil revenue cannot make sufficient money to sustain, they will drop out while Saudi Arabia can still remain strong. The method that Saudi Arabia used is to increase the production of oil. On the demand and supply graph of oil, with the supply curve shifting to the right, the quantity produced increases and the price decreases. As a result, Chinese oil firms were also negatively affected, even though they had somewhat support from the government.
Apart from crude oil price, the oil products market was also not looking very prospective in 2015. The growth in domestic demand for oil products declined, just as I analysed in the GDP growth rate section. According to the Sinopec 2015 annual report, consumption of oil products increased by only 1.2% from 2014 to 2015. The demand for gasoline and kerosene increased by 7% and 9.3%, respectively. However, the demand for diesel decreased by 3.75%. Moreover, the government increased the oil consumption tax and increased the price floor on oil. On the one hand, demand for oil will further decrease now that it is more expensive to consume oil. A price floor above the equilibrium level determined by the demand and supply curves of the market means that less oil will be demanded by the consumers. Those two economic issues will be a challenge for Sinopec in the future. On the other hand, since the supply of oil is more elastic than the demand of oil, the consumers will bare a greater burden of the tax. From this perspective, Sinopec will not be hurt by that much due to these two policies.
For the chemicals market, in 2015, the overall demand was relatively stable. According to the Sinopec 2015 annual report, the demand growth rate for the following chemicals are summarized in the table below.
Chemical Growth rate
Synthetic resin 5.5%
Synthetic fibre 10.6%
Synthetic rubber 8.8%
Part 3 Financial analysis
The firm’s stock is trading at around 6 HKD at the time the report is written. For the past three years that the stock has been trading on the HKSE, the price has shown a decreasing general trend and was heavily affected during early 2015 due to the crude oil price drop.
Items 2015 2014
RMB Million RMB Million
Operating income 2,018,883.00 2,825,914.00
Operating profit 52,081.00 65,481.00
Profit before tax 55,959.00 66,481.00
Net profit 32,207.00 47,430.00
Net cash flow from operating activities 165,818.00 148,347.00
Total assets 1,443,129.00 1,451,368.00
Total liabilities 657,596.00 804,273.00
Total Equity 675,379.00 594,483.00
Total number of shares (1,000 shares) 121,971,219.00 118,280,396.00
From the table, we can see that the firm’s operating income decreased by 28.6%; its operating profit decreased by 20.5%; the net income decreased by 32.1%. Only net cash flow from operating activities increased by 11.8%. The total size of the firm, the total assets, decreased by 0.6%. The firm’s structure changed so that it has less liabilities and more equity. With the overall economic and industry looking not so profitable, the firm decreased its leverage to hedge some investment risks.
The five year trend showed the operating income and net profit margin in millions RMB. The net profit margin has decreased over the 5 years while the size of the firm increased. The revenue increased continuously from 2011 to 2014 but decreased in 2015.
3.2 By segments
3.2.1 Exploration and production
Breaking down the firm’s business into sections, we can conclude that the exploration and production of oil business declined from last year. Summary of the financials of this segment is presented in the table below. The graph showed that only natural gas production and overseas crude oil production has increased. However, the overseas crude oil production is only a small percentage of the overall business. Even though the firm used strategies such as dynamic investment decision-making mechanism and reduced high cost oil production, the decrease in crude oil price and the influence of the general economic environment is still not negligible.
2015 2014 % change
Oil and gas production (mmboe) 471.91 480.22 -1.7%
Crude oil production (mmbbls) 349. 360.73 -3.1%
China 296.34 310.87 -4.7%
Overseas 53.13 49.86 6.6%
Natural gas production (bcf) 734.79 716.35 2.6%
3.2.2 Refinery segment
The performance of the refining segment is summarized below and the unit is in million tonnes. The increase in kerosene is the most promising while the decrease in diesel was mainly due to the overall decrease in market demand. The other sections remained relatively stable.
2015 2014 % change
Refinery throughput 236.49 235.38 0.5%
Gasoline 53.98 51.22 5.4%
Diesel 70.05 74.26 -5.7%
Kerosene 2.435 20.75 17.4%
Light chemical feedstock 38.81 39.17 -0.95
Light products yield (%) 76.5 76.52 -0.02%
Refinery yield (%) 94.75 94.66 0.09%
3.2.3 Marketing and distribution segment
The financials of the marketing and distribution segment is summarized below. Overall, the change from previous year’s data is small and the business remained relatively stable.
2015 2014 % change
Total sales volume of oil products (million tonnes) 189.33 189.17 0.1%
Total domestic sales volume of oil product (million tonnes) 171.37 170.97 0.2%
Retail 119.03 117.84 1%
Direct 52.34 5.313 -1.5%
Annual average throughput per station (tonne/station) 3896 3858 1%
3.3 Comparison and position in the industry
From this point and onwards, the report will compare the financial position of Sinopec with its competitors in the industry to get a more comprehensive picture of how the firm is doing in its own industry. The two largest competitors for Sinopec are PetroChina and CNOOC. PetroChina Company Limited is also traded in HK with stock ticker 0857.HK. It is a part of the state-owned firm China National Petroleum Corporation headquartered in Beijing. It is ranked number 4 on the Fortune 500 list. CNOOC is a subsidiary of China National Offshore Oil Corporation and it is also traded in Hong Kong with stock ticker 0883.HK. This section will compare the financial performances of Sinopec with those two firms because they have similar businesses and are all large international firms based in China and traded in Hong Kong.
The gross profit margin graph showed that the three firms have performed relatively stable over the past four years.
The net profit margin is also relatively smooth for two of the firms over the past four years. Sinopec performed in the middle, better than PetroChina and worse than CNOOC. Interestingly, in 2015, with the decrease in crude oil price, both PetroChina and CNOOC has seen a decrease in net profit margin while Sinopec’s data increased slightly. With the 2015 decrease of CNOOC, the three firms have a closer net profit margin now and are basically on the same level.
The return on equity measure showed that the three firms had all seen a decrease in ROE over the past four years. Sinopec performed better than the others because also it exhibited a decreasing trend, it still has the highest ROE amongst the three firms. CNOOC has performed similarly to Sinopec until 2014. However, the ROE for CNOOC dropped down to a level comparable with PetroChina and is behind Sinopec in 2015.
The return on assets showed that Sinopec used to perform in the middle and jumped to the first place in 2015. Both PetroChina’s and CNOOC’s figures had been decreasing while Sinopec’s figure decreased less. The industry trend made it such that assets are more expensive to acquire and profits are less easily to reap.
The earning per share data for the three firms showed that Sinopec and PetroChina performed better than CNOOC. The trend is that both the EPS for Sinopec and PetroChina are increasing while the EPS for CNOOC decreased dramatically. Sinopec was performing the lowest in terms of EPS amongst the three firms in the past few years until 2015, when CNOOC decreased to the lowest firm.
The asset to liability ratio showed that the three firms had kept a relatively stable structure over the past few years. Sinopec decreased slightly in this ratio while the other two firms slightly increased their asset to liability ratio. Sinopec has a lower asset to liability ratio than the other two firms, suggesting that Sinopec is leveraging up more and investing more than the other two.
Quick ratio is shows a firm’s ability to pay back its liabilities with the most liquid form of assets such as cash, short term investments and account receivables. Sinopec has a quick ratio above one and is much higher than the other two firms over the past few years. CNOOC’s data is the most volatile and decreased by about 100% over the past four years. PetroChina stayed at a low level and did not change much over the years.
The current ratio shows the firm’s ability to pay back its current liabilities using its current assets. PetroChina is once again fairly stable and did not change much over the years. However, the data for PetroChina is also significantly lower than the other two firms. Sinopec has increased its current ratio over the years and had a similar current ratio to CNOOC in 2015. Both of those two firms had a current ratio higher than 1.5, suggesting that in case they have to sell their current assets to pay back the current liabilities, they are solvent and will still have a considerable amount of asset left.
3.3.3 Operating capacity
The number of days in account receivable measures how much days on average it takes for a firm to receive the sales revenue. Sinopec performed in the middle with PetroChina the fastest and CNOOC the slowest. The general trend for all three firms is a slowing down in the speed of receiving their sales revenue. CNOOC is quite volatile and needs to manage their account receivables more efficiently.
The number of days in inventory showed how many days on average it takes to sell the products in an inventory. Sinopec is the fastest amongst the three firms and PetroChina is the slowest. Interestingly, PetroChina increased its speed in selling their inventory in 2015 while the other two firms all slowed down.
3.3.4 Cash flow analysis
The operating cash flow to revenue ratio showed how much cash flow is generated through operating activities for every one dollar of revenue generated. Sinopec had the lowest figure even though it increased to a level comparable with that of PetroChina’s in 2015. CNOOC had the highest value, suggesting that the cash it generated is higher than the other two firms.
Part 4 Future prospects
4.1 Short term
Sinopec PetroChina CNOOC
2016 -3.70% 36% -3.80%
2017 -0.15 8.50% 4.50%
Based on 30 analysts’ forecasts, the future can be summarized with little growth for CNOOC, high growth for PetroChina and a reduction in revenue for Sinopec. In 2014, Sinopec’s profit declined about 30% due to decreased crude oil price, unsuccessful overseas investments, and the government’s attempt to eliminate corruption. The firm’s number 1 ranking in the industry might not be able to last for the long term.
PetroChina, the firm with the largest revenue, also faced serious consequences in recent years due to the anti-corruption movement. Its former chairman Yongkang Zhou stepped down and was arrested for corruption. Luckily, this firm is strong in refining and distribution businesses, which helped it to recover soon and grow more in the future.
CNOOC, the smallest one of the three oil giants in China, is less affected by the drop in oil price. It increased sales due to two major advantages over the other two firms: first, it does not engage in oil refining, which saved the firm from the decrease in oil price. Second, the offshore oil resources exploration is almost a monopoly market with CNOOC as the only market participant. Therefore, can increase the price and cut down the cost.
In short, the future position of Sinopec does not look as promising as the other two firms.
4.2 Long term
This section will talk about the company’s future prospects for the very long term. According to a research conducted by the UK Energy Research Centre, they studied the physical depletion of conventional oil and concluded that a peak of conventional oil production before 2030 appears likely (Sorrell, Speirs, Bentley, Brandt, & Miller, 2010). Oil depletion has become an important issue and many researchers gave their different opinions on when the world will run out of oil. As a major oil production, extraction, and refinery firm, there will the firm go in the long term once we are even more closer to oil depletion is a challenge for the firm.
Part 5 Conclusion
In conclusion, although Sinopec has performed strongly in the past, due to government policies, the general economic environment, the firm operates in a volatile and risky market. In the past two years, the financials of the firm had been negatively affected by the general trend. In the future, especially with the oil depletion problem in the long term, the firm may face more challenges. Competition from its competitors is also fierce. There are more problems that remain to be solved by the firm and whether the firm can still remain to be the number 1 oil and gas firm in China in the future remains to be discovered.
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