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Global Top Cat

Destination Asia: The Stocks to Own Now

By Yiannis G. Mostrous, on Jul. 3, 2014

China Petroleum & Chemical Corp (Sinopec) explores for and produces crude oil and natural gas, and owns refineries and petrochemical plants that produce gasoline, diesel, jet fuel, kerosene, ethylene, chemical fertilizers and other producers.

Last year, China’s National Development and Reform Commission announced a new pricing mechanism that aims to improve fuel quality domestically and compensate refiners for the associated upgrades to their plants.

Of China’s three national oil companies, Sinopec stands to benefit the most from this reform; management expects the firm’s average refinery margins to widen by almost US$2.00 per barrel, equivalent to a roughly 10 percent increase in annual earnings.

On the macro level, China’s energy sector should benefit from low inflation and elevated oil prices, supported by the upheaval in Iraq and elsewhere in the Middle East.

In terms of company-specific upside drivers, Sinopec has announced plans to spin off its marketing division, while the energy giant also has promising coal-gasification projects, shale development plans and the aforementioned upgrades to its refineries and petrochemical plants.

Executing on these fronts should result in a re-rating of Sinopec’s stock and a premium valuation relative to China’s other national oil companies.

Sinopec’s ongoing development of the Fuling shale field in southwestern China shows particular promise; management earlier this year called for production to ramp up to 10 billion cubic meters of natural gas per annum in 2017.

The company estimates its total shale gas reserves in Sichuan and surrounding areas at 12.75 trillion cubic meters of natural gas.

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