Lorraine Tan
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Morningstar | Lowering Sinopec's Earnings Outlook and Fair Value Estimate on Weaker Oil Prices

We lower Sinopec's fair value estimate to HKD 6.10 (ADR of USD 78) from HKD 6.40 (USD 82) as we cut our near-term crude oil price assumptions. The Energy Information Administration, or EIA, lowered its 2019 forecast for the price of Brent crude by 4.6% to USD 66.69 per barrel, citing weaker global demand, although its 2020 estimate is unchanged at USD 67. Our near-term futures-based price assumptions point to further weakness and we factor in a Brent crude price forecast of USD 64.75, USD 59.48 and USD 58.57 for 2019, 2020 and 2021, respectively. This will lead to widening upstream operating losses for Sinopec and cuts of 6.5%, 9.3% and 7.2% to our net profit forecast for the three years. However, our mid-cycle Brent oil price assumptions are unchanged at USD 60. While Sinopec's share price retraced on global oil demand concerns, we think a bigger buffer is needed before we would buy, but we believe much of the downdraft is already reflected at the current share price level. We believe a current dividend yield of 10% will lend support.

Our fair value estimate includes possible gains equivalent to HKD 0.57 per share from the spin-offs of its marketing business into a separate listing and the sale of its pipeline assets. Our special report "Constraints in China's Natural Gas Sector Present Opportunities" provides an assessment into the potential value of the sale of its pipeline assets to a national pipeline firm. We estimate a possible one-off gain of CNY 14.8 billion from this sale.

Given the weak oil price outlook, we expect Sinopec to have flat earnings over the next five years and capital expenditure to decline to 3.9% of revenue in our mid-cycle assumption, from the budgeted 4.9% in 2019. We think organic reinvestment will fall because of the spin-offs but Sinopec could make more acquisitions. We maintain our dividend payout ratio of 83%. In our base case, Sinopec could be in a net cash position in 2021 so the potential for higher dividends is possible.
China Petroleum & Chemical Corp.


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Lorraine Tan

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