Oil Trading Losses May Be No Cause for Panic on China's Sinopec
Bloomberg
Published Jan 07, 2019 16:00
Updated Jan 08, 2019 04:29
Oil Trading Losses May Be No Cause for Panic on China's Sinopec
(Bloomberg) -- Sinopec Corp. shares trading near a two-year low may be a good buying opportunity as recent trading losses at the Chinese refining behemoth could be manageable.
Sinopec, officially called China Petroleum & Chemical Corp., has slumped about 10 percent in the past month amid a global oil rout and after it reported losses on derivatives linked to crude prices at its main trading unit, known as Unipec. That’s made it the second-worst performer on the Bloomberg Asia Pacific Oil & Gas Index over the period.
Investors have been too bearish over the trading losses, according to Morgan Stanley (NYSE:MS), which maintained its overweight rating on the stock. The company is better positioned than peers to deliver stable and strong free cash flow, China International Capital Corp. said, adding that the stock remains its top pick among oil and gas companies over the long run.
“We believe the market expectation for the trading loss is too bearish, and we think this has introduced a good buying opportunity,” Morgan Stanley analysts including Andy Meng said in a note dated Sunday. The company is unlikely to book a big loss in the fourth quarter, they said.
The company, which hasn’t disclosed the size of Unipec’s losses, said Friday they were related to the unit’s hedging transactions, unearthed during regular supervision and that independent auditors are looking into the issue.
Price Targets
The stock has rebounded 6 percent to HK$5.74 since bottoming at a two-year low on Dec. 28, after the losses were announced. While at least seven analysts tracked by Bloomberg have cut their price targets on Sinopec over the past month -- which coincided with a collapse in global oil prices -- the stock is still far below the consensus estimate of HK$8.
Sinopec has a price-to-earnings ratio of 8.4 times, compared with the average of 12.2 times for 20 global peers including Exxon Mobil Corp (NYSE:XOM). and Royal Dutch Shell (LON:RDSa) Plc, according to data compiled by Bloomberg. That makes it one of the lowest valued oil stocks in the world. Almost all the analysts covering Sinopec has the equivalent of a buy rating on the stock, the data show.
The exception is Citigroup Inc (NYSE:C). The bank downgraded Sinopec to a sell, saying the company will barely break even in the fourth quarter because of an estimated 20 billion yuan ($2.9 billion) inventory loss -- or drop in value of crude and products it has in storage because of the crash in oil prices -- as well as a potential 7.6 billion yuan hit from Unipec. The trading issue raises concern about corporate governance, Citi analysts including Toby Shek said, adding that investors might be too optimistic on dividends.
Get The App
Earnings Outlook
As of Monday, Sinopec is expected to see fourth-quarter net income of about 15.5 billion yuan compared with 11.8 billion in the same period last year, according to the average of 12 full-year profit estimates compiled by Bloomberg. The company will probably publish results at the end of March.
Sinopec raised its dividend payout in August after reporting record half-year earnings, fueled partly by improving refining profits.
“The potential negative impact of the incident has been priced in,” CICC analysts Nelson Wang and Chen Lu wrote in a note Monday, referring to the losses at Unipec. “Its higher-than-peer dividend yield is still a bright spot that merits attention.”
Written By: Bloomberg
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.