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PetroChina, Sinopec Slide on Refining Worries

Shares in PetroChina dived more than 8 percent on Thursday after its half-year results disappointed investors, but analysts expect Beijing to raise fuel prices in coming months to help mitigate refining losses in the country's oil sector.

Shares in rival and top Asian oil refiner Sinopec fell as much as 7 percent despite news that it won a $1.7 billion government bailout as compensation for swallowing losses to keep an increasingly tight market supplied.

Analysts believe the grant would not fully cover mounting losses with oil prices hovering above $100 a barrel.

PetroChina, the world's most valuable oil and gas producer, which vies with Sinopec and CNOOC, posted a lackluster 3.7 percent rise in second-half earnings, blaming refining losses and $6 billion in windfall taxes.

China's crude processors are all deeply loss-making because of gaps between soaring world oil prices and low state-set domestic fuel prices, which Beijing is reluctant to adjust because of concerns about inflation and social unrest.

But the disparity is triggering a fuel crunch.

PetroChina and Sinopec are rationing diesel in southern Guangdong province and the suburbs of Shanghai to ensure supply to all vehicles because of shortages at private stations, causing a repeat of the long queues seen in November.

"We have seen a spreading shortage of gasoline and diesel in Guangdong province, and if the situation continues to deteriorate, we might see an increase in product prices," said UBS analyst Thomas Wong.

Cash Infusions

PetroChina's refining and marketing division posted its worst-ever half-year loss of 24.6 billion yuan in the second half of 2007. Chairman Jiang Jiemin said on Wednesday it has lobbied Beijing for an adjustment of domestic fuel prices and tax rebates for imported crude.

"The first half of 2008 is shaping up to be even worse, but we believe the government will be forced to raise gasoline and diesel prices in the coming months," Citigroup said in a report.

Unlike PetroChina -- which never receives a government bailout -- state-run Sinopec received its third cash infusion in as many years, of 12.3 billion yuan, of which 4.9 billion yuan was a subsidy for 2007 and 7.4 billion yuan for the first quarter of this year.

"The 7.4 billion yuan subsidy in the first quarter of 2008 is not sufficient to offset our estimated refining losses of 17.8-18.4 billion yuan," Goldman Sachs's Kelvin Koh said. "We expect the second quarter 2008 refining losses to be even bigger, so the big question is whether the government will continue to give out subsidies every quarter."

He now assumes 20 billion yuan of subsidies in 2008, but still expects refining losses of 25 billion yuan, after subsidies.

However, analysts said PetroChina's plan to buy out its state parent's slice of a multibillion-dollar joint venture that now owns all of the wider group's overseas operations will be a positive catalyst for its share price.

"We believe this deal makes strategic sense and will be done on reasonable terms," Koh said. "A 100 percent ownership versus the current 50 percent by PetroChina could add 1-2 percent and 4-5 percent to earnings in 2008 and 2009."