Shares in Sinopec slid 5 percent on Monday after Asia's top oil refiner posted a sharper-than-forecast dive in quarterly earnings, while analysts expect lofty crude prices to keep eroding margins.
China's No. 2 oil and gas producer is expected to post poor earnings in the first quarter as the gap widens between soaring global oil prices and low state-set domestic fuel prices, although analysts believe the situation may improve with government help.
The firm, which vies with producers PetroChina and CNOOC to fuel the world's largest oil market after the United States, posted a 13.67 billion yuan (US$1.95 billion) operating loss at its refining division in 2007, much of that in the fourth quarter.
"In the near term, we expect poor first-quarter earnings to weigh on share price performance," Citigroup analyst Graham Cunningham said in a research note. "We continue to believe the present situation in China's refining sector is unsustainable and will improve on a six-month view."
Sinopec said in March it won a 12.3 billion yuan government bailout to compensate for refining losses, of which 4.9 billion yuan was intended to cover losses in 2007 while 7.4 billion yuan covered the first quarter of this year.
UBS analyst Thomas Wong estimated Sinopec's refining loss could remain at about 8 billion to 9 billion yuan in the first quarter of this year, even taking into account the government grant.
"We believe the government will continue to subsidize Sinopec for its refining losses," Wong said.
Sinopec posted an October-December net profit of 6.71 billion yuan, versus a slightly revised 18.82 billion yuan profit a year earlier, according to Reuters calculations off full-year 2007 earnings and previously announced nine-month earnings.
The result lagged a forecast of 12.75 billion yuan from 20 analysts polled by Reuters Estimates.
Sinopec Vice Chairman Zhou Yuan said in March the firm was losing 2,000 yuan for every ton of gasoline it produced, and even more for diesel.
Global crude oil prices jumped to $96 a barrel at the end of 2007 from $80 at September's end, before striking an all-time high above $110 in March. High prices tend to favour crude oil producers while hurting refiners such as Sinopec.
Yet analysts were also surprised with the poor performance of the company's exploration and production (E&P) division.
"The main disappointment was in its E&P sector, where its EBIT fell 22.8 percent to 48.8 billion yuan despite higher oil prices," said Lehman Brothers analyst Cheng Khoo. "The poor sector result was due to lower realized oil prices, windfall tax and escalating cost, where lifting cost was up 15 percent."
Sinopec shares fell as much as 5 percent on Monday after the results, although late morning, they had recaptured some lost ground, down 3 percent at HK$7.25. The benchmark Hang Seng Index was higher.
The shares rose 21 percent in the fourth quarter of 2007, beating PetroChina's 5.7 percent fall and a 5.2 percent drop in the index of Hong Kong-listed Chinese firms.
Before Monday's decline, Sinopec had traded in line with the global oil sector at about 9 times forecast earnings, versus BP's 8.8 and Exxon Mobil's 10.7.