WebelieveinvestorsshouldstayinvestedinSinopecgivenassetrestructuringandrefiningmarginimprovements.ThepositiveimpactoftheimplementationofnewrefinedproductandgaspricingisevidentinSinopec’sresults.Althoughthemarketanticipatesfurtherimprovement,webelieveassetrestructuringmayleadtore-ratingandwemaintainourAddratingonthestock.WestayOverweightonthesector,withSinopecasourtoppicks.
Findingthecrumbsonthe1Q14trail
Inthe1Q14results,weseepositiveevidenceoftheimpactofgovernmentpolicyonoilcompanies’operationsandfinancialperformance.Bothupstreamandrefiningbusinessesimprovedduetothenewnaturalgasandrefinedproductpricingmechanisms.SincethenewnaturalgaspricingwasintroducedinJuly2013,PetroChina’sandSinopec’snaturalgasASPhasincreasedby15-16%whilebothcompaniesrespondedtothepricehikewithhigherproductionvolume.China’srefiningmarginsalsoimprovedwiththenewpricingmechanismandpricehikesfromthefuelupgrades.
PetroChinaandSinopecpostednetrefiningmarginsofUS$1.3/bblandUS$1.5/bblin1Q14,respectively.
Restructuringakeytheme
Besidestheexpectationofrefinedproductpricehikesfromhigherqualitygasolineanddieselaswellastheincreaseinnaturalgaspricesthisyear,SOErestructuringwillbeapotentialcatalysttounlockvalueintheChinaoil&gassector.SinopechasalreadyappointedanumberofinvestmentbankstomanagethepartialsaleofitsmarketingbusinesswhilePetroChinaisalsoassessingitsassetrestructuringstrategy.
Stayinvested
WhilewebelievethemarkethaslargelypricedintheexpectationofSinopec’simprovingrefiningmargin,corporaterestructuringandpotentialupstreamassetinjectionsareupsidecatalysts.