Sinopec benefits from fuel price floor but share price reflects uncertainty on profit booking
NDRC says extra revenues resulting from policy must be set aside
Beijing’s latest tweak to the mainland’s petroleum fuel pricing policy will bolster the cash flows of state-backed refining titan China Petroleum & Chemical (Sinopec), but how much it will boost its profit is less clear.
Regardless, the price floor the energy price regulator, the National Development and Reform Commission (NDRC), has put under refined fuel products like diesel, petrol and jet fuel is positive news for the oil major, which had been suffering steep losses in upstream oil production as crude prices fell to well below its production costs.
In the middle of last month the NDRC said domestic refined fuel prices would not be cut if international crude oil prices fell below US$40, swelling Sinopec’s downstream refining profit margin and cash flows as the prices of its raw material, crude oil, sank to their lowest in more than 12 years.
“The NDRC’s recent directive to set a US$40 floor for auto fuel prices should more than offset [the impact of lower crude prices on upstream operations],” a report by Barclays’ analysts said of the impact on Sinopec. “The gains [from refining] may be transient but cash flow is now similar to that [when the Brent crude benchmark price was] at US$100 a barrel [in 2013-14].”
Sinopec, the world’s second-largest oil refiner, was a net beneficiary of the latest policy since it refined five times as much crude oil as it produced, they said.
What is less clear, is whether and by how much Sinopec can book the profit gains on its refining operation.