We downgraded our recommendation on China Petroleum & Chemical Corporation or Sinopec ( SNP ) to Underperform from Neutral on Jul 11, 2013.
During the first quarter, all the company's segments but for Refining registered losses. Moreover, increases in the price of international crude oil amid government caps on fuel prices prevented Sinopec from fully passing on the spiraling costs to consumers.
Sinopec's operating income for the Fuels Marketing segment decreased 11.2% year over year. The considerably high volumes were unable to offset lower margins. Owing to its larger downstream refining and petrochemicals operations compared to its rival PetroChina 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 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 positive catalyst in the near term.
Other Stocks to Consider
While we prefer to remain on the sidelines for Sinopec, Zacks Ranked #1 (Strong Buy) stocks - Matador Resources Company ( MTDR ), Gulfmark Offshore, Inc. ( GLF ) and Dril-Quip, Inc. ( DRQ ) - are expected to perform impressively over the short term.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.