Refining Losses Hit China’s PetroChina, Sinopec

Hefty refining losses continued to weigh on profits at Chinese state oil giants PetroChina and Sinopec Corp in the first three months of the year, with the latter posting a worse than expected 35 percent drop in earnings.

But the worst may be over because the Chinese government raised gasoline and diesel prices twice in the first quarter, and crude prices may have peaked for this year, some analysts say.

"This should mark the bottom of their earnings cycle," said Gordon Kwan, head of Energy Research at Mirae Asset Securities.

"They came too late to save the first quarter but they should boost the second quarter revenue," Kwan said, adding that both companies should also see better petrochemical margins in the next few months.

Chinese refiners cannot fully pass on higher crude costs to consumers because the government controls oil product prices to curb inflation.

Fuel price hikes in China are often smaller, and implemented later than required under a government-set formula that tracks changes in global crude costs.

Sinopec said on Thursday that its net income fell to 13.41 billion yuan ($2.13 billion) in the first three months from 20.6 billion a year earlier. That missed the average forecast of 16.69 billion yuan given by seven analysts polled by Reuters.

Its refining division, the largest in Asia, lost 9.2 billion yuan in the first quarter. Credit Suisse expects the loss to widen to 56 billion yuan for the full year, assuming Brent crude prices average $125 per barrel this year, compared with a loss of 37.6 billion yuan in 2011.

PetroChina, China's biggest oil and gas producer, posted a 5.8 percent rise in first-quarter profit, beating forecasts, as strong oil and natural gas production gains offset losses at its refining and chemicals businesses.

Its net income was 39.15 billion yuan in the first quarter, compared with 37 billion a year earlier. That beat average forecast of 33.97 billion yuan by eight analysts.

PetroChina posted a refining loss of 10.4 billion in the first quarter, after losing 60 billion yuan in the whole of last year. But its exploration and production division recorded an operating profit of 60.4 billion yuan for the first quarter, up 32 percent on a year ago.

PetroChina's refining arm posted heavier losses than Sinopec Corp, even though its refining capacity is much smaller than that of Sinopec, partly because PetroChina refined more so-called sweet, low-sulphur crude than Sinopec.

Sinopec relies heavily on Middle East crude that contains more sulphur and hence is cheaper than sweet crude, company officials have said.

PetorChina said its crude oil and natural gas output rose 6.1 percent year on year to 345.5 million barrels of oil equivalents (boe) in the first three months of this year.

Its refining thoughput edged up 2.8 percent to 257.1 million barrels in the first quarter, with the production of gasoline, diesel and kerosene rising 4.7 percent to 23.02 million tonnes.

Sinopec refined 55.41 million tonnes of crude oil in the first quarter, up 2.13 percent from a year earlier. Its output of oil products climbed 5.01 percent to 32.87 million tonnes.

Shares in Sinopec closed up 0.49 percent in Hong Kong on Thursday ahead of the results announcement. The stock had lost 9.7 percent in the past three months, underperformed by PetroChina's 1.6 percent fall in the same period.

PetroChina's Hong Kong-listed shares ended up 1.44 percent on Thursday.

Earlier this week CNOOC Ltd reported a 6.3 percent drop in crude oil and gas output in the first quarter after a spill shut its biggest oilfield last year, as the top Chinese offshore oil producer struggles to deliver production growth for this year.

(Reuters, Edited by Topco)