Stellar 2Q15 & 1H15 results - Maintain Buy
Sinopec (SNP) reported strong 2Q15 results of Rmb 0.19/ share vs. our 0.09.Results 1H15 were 0.21/ share vs. our 0.11. Refining (Rf) and Chemicalssurprised to the UPside; E&P broke even while Marketing firmly beat. It looksas if SNP is managing E&P to break even in order to maximize downstreamresults. Inventory losses will overwhelm 3Qe. We see break even on E&P atUS$ 60 Brent or a SNP ASP of US$ 53/ bbl. We have taken down E&P Ebit tozero and increased Rf and Chemicals 2016-17e.
DB lowers oil price forecasts
On 01-Sept DB Commodities lowered its oil price forecasts. Our new Brent oilprice forecast 2015-18-terminal is US$ 55/ bbl, 57, 63 and 70/ bbl. Our previousestimates were US$ 60, 70, 75 and 80/ bbl. Tight oil cost efficiencies in the UScontinue to pile up in terms of longer laterals, new technologies and fallingservice costs. Wood Mac is now talking break evens of US$ 45/ bbl including a10% ROIC. Oil prices: lower for longer – maintain Buy on Sinopec.
Investment thesis
SNP is trading cheap to global peers. We show the stock at 8.8x our 2016estimates vs. 15x for the global peer group. SNP is trading at 41% discount toglobal peers. In good times, China SOE O&G companies trade up to parity withglobal peers; in bad times, the SOE discount to global peers settles in at +/-35%.SNP’s 5-year mean PE valuation is 11.5x forward estimates. We viewSinopec as very cheap to global peers and recommend buying the stock.Valuation and risks
We value SNP from a DCF model. Our WACC is 7.5% and consists of a CoE of9.5% an after tax CoD of 2.9% and 30.3% Debt-to-Capital We use a DB ChinaRfr of 3.9% and ErP of 5.6%. We use a TG rate of 1.5%, which we view as areasonable assumption for the company’s LT BOE production growth. Theprincipal risks to our Buy rating are: 1) materially lower oil prices; 2) materiallyslower global growth; and 3) spread weakness in Chemical markets.