Filling Up at China's Pumps

05/06/2010 1:00 pm EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says Sinopec is a great way to play the whole range of the energy production, refining, and distribution network in China.

China Petroleum & Chemical (NYSE: SNP) is best known by its abbreviated name, Sinopec (not to be confused with the state-owned parent Sinopec Group that is still a partial owner).

Sinopec is China’s second largest producer of oil and natural gas. As a fully vertically integrated petroleum, energy, and petrochemical company, Sinopec stands out as a world-class player.

Sinopec has proven reserves of more than four billion barrels of oil and 2.9 trillion cubic feet of gas, and it owns more than 29,400 gas stations. The company’s diverse businesses include oil and gas exploration and production, crude oil refining and processing, transportation, distribution and marketing, and the production and distribution of petrochemical products.

Sinopec is focused on key projects, such as stabilizing the production of mature oilfields in the east, quickly putting new production capacities in the west into operation, as well as gas transmission from Sichuan to East China.

Sinopec hit a historical high in oil and gas production through further improving the development of oil and gas fields. Last year, the company produced 2.968 mmbbls of crude oil and 293.07 bcf of natural gas.

Sinopec is China’s largest petroleum refiner and oil products producer, with its refining capacity ranking third in the world. The company’s major oil products include gasoline, kerosene, diesel, lube oil, chemical light feedstock, fuel oil, solvent oil, petroleum wax, asphalt, petroleum coke, LPG, propylene, and benzene products for refining.

Sinopec boasts the largest nationwide service station network, covering China’s cities and countryside, on roads, expressways and waters. By offering gasoline, diesel, kerosene, lubricants, convenient store goods and non-fuel products, these stations serve government organizations, businesses, agricultural and private consumers.

Sinopec’s marketing portfolio of oil products (mainly gasoline, diesel, lamp kerosene, and jet fuel) sales business consists of four parts. First, the company supplies oil products to customers through its retail network which includes retail sites, oil products stores, countrywide. This network serves as the principal channel for oil products sales.

Second, oil products are distributed directly to end customers (non-service stations). Third, the company directly sells oil products to key accounts. Fourth, oil products are sold through wholesale centers (oil depots) to local marketers and independent retailers.

Sinopec carries a low P/E multiple of 8.9x, partly due to a price war with PetroChina in major cities. That situation is now coming to an end. What’s more, Sinopec offers investors a dividend of approximately 2.55%. SNP was added to our Buy list with a “buy up to” price of $85 a share. The stock is currently trading at [around $75.50] a share.

We have a target sell price of $125 a share, and our stop loss price is $72.00.

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