Sinopec Downgraded to Underperform - Analyst Blog
January 13 2014 - 1:30PM
Zacks
We downgraded our recommendation on
China Petroleum & Chemical Corporation or
Sinopec (SNP) to Underperform from Neutral on Jan 10, 2014. The
company currently retains a Zacks Rank #5 (Strong Sell).
Why Downgraded?
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 to consumers.
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. (PTR), 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 term.
Other Stocks to Consider
Not all stocks indicate poor performance like Sinopec. Zacks Ranked
#1 (Strong Buy) stocks – Helmerich & Payne,
Inc. (HP) and Seadrill Partners LLC
(SDLP) – are expected to perform impressively over the short
term.
HELMERICH&PAYNE (HP): Free Stock Analysis Report
PETROCHINA ADR (PTR): Free Stock Analysis Report
SEADRILL PTNRS (SDLP): Free Stock Analysis Report
CHINA PETRO&CHM (SNP): Free Stock Analysis Report
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