Sinopec Sees Solid Gas Growth Ahead

Includes: PTR, SNP
by: Zacks Investment Research

China Petroleum and Chemical Corporation (NYSE:SNP), or Sinopec, targets more than 40% natural gas output for this year based on growing confidence on its gas fields. The company said that Yuanba gas field has similar potential to the neighboring Puguang field’s output. Both the fields are being developed by Sinopec.

While oil production experienced sluggishness in the first half, natural gas production showed solid growth. China is ramping up gas production as it seeks to find alternatives to coal, which emits high carbon levels. It is set to raise the country's energy needs from the current 3% to 10% by 2020.

Puguang field has a proved gas reserve base of 356 billion cubic meters (Bcm), next only to the Sulige field (534 Bcm) in the north of the country, run by PetroChina (NYSE:PTR). Even though all the reserves at Puguang are not entirely recoverable, it holds enough gas for more than 20 years of stable production based on its current annual production capacity of 10.5 Bcm.

The company plans to produce 6.32 Bcm of gas in the second half of this year, 11% more than in the first half, thereby increasing annual output by over 40% from 2009. To cope with this increased production volume, Sinopec launched commercial operations at its Sichuan-East China pipeline which will pump gas to Shanghai and the prosperous coastal region.

Though Sinopec provides a favorable view for natural gas, the company has been lagging its domestic peers primarily due to its relatively weak upstream asset base and exposure to the heavily regulated downstream sector. We are currently Neutral on Sinopec with the Zacks #3 Rank (Hold).