Sinopec Remains Neutral

China Petroleum & Chemical Corp. (SNP), aka Sinopec, has been experiencing an upturn following the company’s strong first half results. The price of its ADS increased more than 8% from the last month’s low. The upside coincides with our view that 2010 will be a high-profit year for the company based on increasing trends in production and sales volumes.

Management is now focusing on developing a bigger line of natural gas business including conventional, non-conventional and LNG. The company plans to produce 6.32 billion cubic meters of gas in the second half of this year, 11% more than first half, thereby increasing the annual output by over 40% from 2009. To cope with this increased production volume, Sinopec launched commercial operations at its Sichuan-East China pipeline, which will pump gas to Shanghai and the prosperous coastal region.

The company is trying to build a better position in the E&P space. However, it has been lagging its domestic peers primarily due to exposure to the heavily regulated downstream sector and a relatively weak upstream asset base.

For the second half of 2010, Sinopec intends to adjust its business structure, create marketing channels, control costs and record robust performance. Sinopec has been exploring expansion and acquisition opportunities offshore and abroad to reduce its exposure to mature domestic areas. But given competitive pressures from its domestic and international peers, as well as the possible time-consuming government deregulation and internal company restructuring, meaningful near-term progress is not expected on that front. We currently have a short-term Neutral recommendation for Sinopec with the Zacks #3 Rank (Hold).

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