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The Bad News About Sinopec’s Good First Half

Sinopec, formally known as China Petroleum & Chemical (SNP), is making headlines for an impressive first half but shares are down anyway. With refining results effectively totally dependent on government fuel price mandates and other company results weakened, the market has reason to be less than impressed.

China Petroleum & Chemical Corp. [[SNP]] is down about 1% in midday trading yesterday after opening higher despite impressive mid-year results, fellow Chinese energy company PetroChina Co. [[PTR]] being up and the energy sector as a whole gaining. What is wrong with this picture?

China Petroleum & Chemical, better known as Sinopec, exceeded analysts’ expectations by more than 20%, posting about $4.9 billion in profit for the first six months of the year largely thanks to China’s easing of strict control of domestic fuel prices.

Unfortunately, China’s government has since lowered the price of petroleum and diesel – which is especially bad for Sinopec given that other operating revenue and income fell by 30% from a year ago. In other words, refining fuel for domestic use was the bright spot for Sinopec thanks to higher prices, but those prices are at the whim of the government, leaving concerns about the second half of 2009.

Sinopec is optimistic however: “Looking into the second half of this year, the state will continue applying proactive fiscal policy and relatively easy monetary policy…increasing domestic demand [for fuel].” Also, the company notes crude oil prices are expected to rise internationally in the second half of the year.

The market seems skeptical though.

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