FY16 EPS +44% yoy to RMB0.39/sh; dividend payouts hit 65% for the first time
Sinopec reported FY16 NP up 44% yoy at RMB46.7bn or EPS of RMB0.39/sh,beating the Street estimate of RMB0.33/sh and DBe of RMB0.37/sh. The strongresults were driven by the improved refining margins, RMB20.6bn EBIT gainson Sichuan-East Pipeline’s disposal and continued ramp-up in marketing.Having generated FCF of RMB1.14/sh, Sinopec surprised the market bydeclaring FY16 dividends of RMB0.25/sh (vs. DBe RMB0.22/sh), which meansits payouts jumped by 9%-pt yoy to reach 65% for the first time since listing.With the 1Q17 profit alert expecting NP +150% yoy on a stabilizing oil price,more upside should be expected despite the potential E&P overhangs. Buy.
E&P: The only disappointment in the FY16 results
The E&P segment was Sinopec’s biggest drag, with EBIT of -RMB36.6bn. Allin-cost was at USD57.6/boe vs. realized ASP of USD34.3/boe. SNP’s all-in-costincreased to USD61/boe in 2H16 from USD54/boe in 1H16 as higher oil priceshurt lifting and exploration costs. What hurt SNP the most was its reservemark-down on SEC reporting, causing unit DD&A to increase by USD6.6/bbl toUSD26.7/boe in 2H16. After the reserve write-down and ensuing lack ofreserve replacement, reserve life fell to only 6.5 years, with crude falling to 5.1years. Sinopec’s three-year RRR fell to a negative level for the first time at -6%.
Refining, chemicals & marketing: The cash cow continues to grow
Downstream (refining, chemicals & marketing) has been seen as a defensiveplay since the oil price plunge, but SNP has proven to be more than that. In2016, its refining EBIT/bbl was up by 1.5x yoy to USD5.3/bbl. Even if excl.c.RMB10bn windfall profits, its EBIT/bbl would still double to USD4.3/bbl on alower diesel-to-gasoline ratio at 1.19 (vs. 1.3 in 2015) and oil product upgradesunder the current favorable pricing policy. A continued ramp-up of non-fuelsales (+41% yoy) and fuel sales volume (+3% yoy) despite diesel’s weaknesshave driven marketing EBIT up by 11% yoy to RMB32.2bn. While ChemicalsEBIT/t leveled off at RMB321/t, an 8% yoy jump in sales volume liftedChemicals EBIT by 6% yoy to RMB20.6bn.
Outlook
Sinopec is levered to a rising oil price environment, as evidenced in its 1Q17profit alert, which indicated earnings would improve 150% yoy. The biggestsurprise is SNP’s capex guidance of RMB110bn in 2017, up 44% yoy aftercompleting only RMB76bn in 2016. Chemicals, refining and E&P will see theirsegment capex grow 70%/58%/56% yoy, according to the plan. E&P willcontinue to account for the bulk of the capex at 46%, but that may not beenough to arrest its declining reserve life. Crude and natural gas production isexpected to grow -3%/+15% yoy, respectively. Refining as part of total capexrose to 21%, with SNP guiding for a +2% yoy throughput recovery supportedby a healthy balance sheet with just 6% net gearing by end-2016.Valuation & risks: Our sum-of-the-parts PT values E&P with DCF (8.5% WACC& 2% terminal growth), and downstream with P/B vs. ROE, where we apply2.8x, 1.6x, and 2.0x target 17E P/B on ROEs of 24%, 14%, and 17% in therefining, chemical, and marketing segments in 2017E. Risks: lower-thanexpectedO&G prices, regulatory changes, unexpected cost inflation.