China Petroleum and Chemical Corporation (Sinopec), the second largest integrated oil & gas operator in China, refines, produces and trades petroleum and petrochemical products such as gasoline, diesel, jet fuel, kerosene, ethylene, synthetic fibers, synthetic rubber, synthetic resins, and chemical fertilizers. Also, the company explores for and produces crude oil and natural gas in China.
The recent recovery in oil prices and the ongoing economic stimulus by China's policy makers will benefit Sinopec. Our Economic Team forecasts of $60 per barrel for WTI and $65 per barrel for Brent. OPEC is likely to squeeze output, while US shale producers will be discouraged form new drilling.
There were concerns about the hedging losses at Unipec however the impact appears to be lower than expected and should be taken positively. Perhaps more importantly, the losses do not seem to be speculative in nature. The stock has rebounded by as much as 18% following the sharp plunge in late December when news of the losses at Unipec broke out. Nevertheless, we believe that the stock remains a key beneficiary of the ongoing economic stimulus by China’s policy makers.
We see Sinpoec's stock to move higher especially should China post stronger than expected economic growth. Also, the exploration & production segment of Sinopec is poised to capitalize on higher oil prices.