We downgraded our recommendation on
China Petroleum & Chemical Corporation
or Sinopec (
) to Underperform from Neutral on Jan 10, 2014. The company
currently retains a Zacks Rank #5 (Strong Sell).
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During the first nine months of 2013, the company witnessed a
sharp drop in crude oil prices, which dragged down the
Exploration and Production (E&P) segment's operating profit
by 15.5% year over year. However, increases in the price of
international crude oil amid government caps on fuel prices
prevented the company from fully passing on the spiraling costs
Sinopec's operating income for the Fuels Marketing segment
decreased 10.5% year over year. The considerably high volumes
were unable to offset lower margins. Owing to its larger
downstream refining and petrochemicals operations than its rival
PetroChina Co. Ltd.
), Sinopec remains highly exposed to government directed price
controls. This is also expected to affect margins in the future.
We remain apprehensive about the volatile oil and gas
fundamentals and a weak macro environment. The company's
prospects are closely linked to the successful completion of its
growth projects, which in turn, might be adversely affected by
operational hindrances as well as overruns and delays in
completion. Further, Sinopec's matured domestic oil fields and
associated rising costs will continue to be an overhang on its
operations as natural declines begin to take a toll.
The other major areas of concern include operational disruption,
labor and material cost inflation that could affect project
outlays, governmental regulations and severe competition from
domestic and international peers. In the E&P space, Sinopec
has been lagging other industry players. This is primarily due to
exposure to the heavily regulated downstream sector, as well as
its relatively weak and capital intensive upstream asset base. In
view of these factors, we do not see any catalyst in the near
Other Stocks to Consider
Not all stocks indicate poor performance like Sinopec. Zacks
Ranked #1 (Strong Buy) stocks -
Helmerich & Payne, Inc.
Seadrill Partners LLC
) - are expected to perform impressively over the short term.