下文是BNP本月初报告全文：调低中石化投资级别，理由是原油价格上升压缩了公司边际利润。事实上，今年2季度以来国际几大投行都推出了调低中石化的报告。国内成品油定价机制，使得中石化、中石油等国内龙头有了一定政策壁垒，但也同时承担了不少外部风险，原油价格变动无法顺利传导至终端，对投资人来说是一种“危机”（危险中隐含机会）。逆风随时会来，这时是判断企业好坏的时候。（陈宏杰博客   blog.sina.com.cn/TimesBaby） 

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       （今天北海布仑特油价突破77美元了，WTI、迪拜市场报价亦快速上升。Brent futures surged over $77/bbl by mid-July on tight fundamentals, increased geopolitical tension and indications of strong fund buying. Falling refining margins suggest that market tightness is shifting from product to crude markets.）

Earnings slowing, refining in the red——THE BNP PARIBAS ANGLE

       Another year of refining losses; maintain REDUCE.

       Talk of CNOOC merger to support stock price.

       Valuation and risks.（陈宏杰博客   blog.sina.com.cn/TimesBaby） 

Another year of refining losses; maintain REDUCE

       Sinopec's stock has declined since the chairman's arrest on corruption and embezzlement charges. August results showing 2Q07 refining losses should add additional pressure. From BNP Paribas' global commodities team's increases to its crude-price estimates (see Exhibit 1), our target price is raised nominally, to HKD7.10, as 1) we continue to assume a "fixed margin" in its refining unit for the long term, and 2) a slight boost to its E&P earnings from higher crude prices. Fundamentally, our view is unchanged – Sinopec's downstream refining and petrochemical operations are due to decline, bringing down the group's earnings. On top of 2006's 30% increase in EPS (boosted by subsidies), we forecast single-digit growth in 2007-2008, hindering stock-price performance.

Talk of CNOOC merger to support stock price The National Development and Reform Commission (NDRC) has suggested a possible merger between CNOOC and Sinopec, with the former to provide subsidized crude to the latter. Management of both companies indicated their doubts of successful integration at this phase.

       Infrastructure in both companies and refining assets in Sinopec have been planned and built without the merger in mind. Nevertheless, Sinopec is a subsidized stock with heavy losses, yet one that is boosted by the theme of refining reform – we believe the merger theme will likely give support to the stock through 2007 as NPC meetings commence.

       Valuation and risks Our HKD7.10 target price is DCF derived, which represents 11.2x 2007 EPS – on the lower end of its historic P/E. We forecast RMB9.5b in refining losses in 2007 (assuming no additional pump-price increases).

       Continued strong performance in petrochemicals, refining subsidies and lower crude prices are key risks to our recommendation. In the absence of subsidies, we expect 2% y-y and 6% y-y earnings growth in 2007-08, hindering stock-price performance. Maintain REDUCE.

       BNP Paribas' global commodities team raises crude forecasts Oil prices in 1Q07 were weaker on average as envisaged in our previous price profile. However, the second quarter has marked a sharp divergence from the path we had retained. Geopolitics and a much tighter US gasoline market combined to push oil prices higher. With a greater scope for a rebound in crude demand, NYMEX WTI averaged $64/bbl in April. At the same time, a slowdown in the US economy, while unfolding, is taking place at a shallower pace and labor markets are showing a degree of resilience. The latest readings of US GDP and consumer confidence are soft, but if growth in personal US disposable income and compensation, then a slowing US economy is likely to have more muted effects than we originally expected, both domestically and abroad.

       From a fundamentals perspective, the balance between growth in global demand and non-OPEC supply has a bearish skew in the first half while confirming a bullish outlook in the second half of 2007. Once you introduce OPEC into the picture, and factor in a much stronger rise in crude demand in 2Q due to gasoline tightness in the US, fundamental balances tighten quickly. This assumes that the 10 members of OPEC bound by quotas maintain their current production (of about 26.7 mb/d) through the quarter and into early Q3. The remarkably tight pre-summer gasoline situation in the US brings forward our price profile in terms of a run-up in prices this year, with prices now peaking toward the end of summer, before easing slightly. Our profile for 2008 is not materially changed.

       Long-term forecasts are heavily affected by rising costs from both greater complexity of new oilfields, and higher materials costs. Noting the recent closure of several Caspian Sea exploration programs, we view several non-OPEC projects as likely candidates for delays and/or closure due to insufficient returns at USD45/b. Materials costs, tight supply of rigs and equipment, and growing complexity of new exploration projects (water depth, surface conditions, lack of infrastructure) are key culprits that we believe will cause supply delays, especially in non-OPEC producers, and provide support for crude oil at USD50/b.

Exhibit 1: BNP Paribas’ Crude-Price Forecasts

                    2006   2007E  2008E  2009E  2010E  2011E  2012E

New

WTI px         66.09   64.40   65.50    62.23   59.11   54.38   50.00

Change (y-y %)         (2.6)      1.7      (5.0)    (5.0)     (8.0)    (8.0)

Previous

WTI px          66.09  57.70   63.30    58.24   53.58   49.29   45.00

Change (y-y %)       (12.7)      9.7      (8.0)     (8.0)    (8.0)    (8.0)

（陈宏杰博客   blog.sina.com.cn/TimesBaby） Source: BNP Paribas estimates

       Possible CNOOC merger to buoy Sinopec stock price Why is CNOOC enjoying 45-50% EBIT margins and Sinopec seeing heavy losses in its core assets? Policy – which is under review in this year's National People's Congress (NPC) meetings. The NDRC has suggested a possible merger between CNOOC and Sinopec, with the former to provide subsidized crude to the latter. However management of both companies have made anecdotal remarks of their doubts of successful integration at this phase. Infrastructure in both companies and refining assets in Sinopec have been planned and built without the merger in mind.

       Nevertheless, Sinopec is a subsidized stock with heavy losses, yet one that is boosted by the theme of refining reform – we believe the merger theme will likely give support to the stock through 2007 as NPC meetings commence.

Refining losses imminent; more subsidies to come?

       Sinopec still yields lower refining margins per barrel than average Asian complex refiners – even with its changes in crude cost accounting, we expect 2Q07 and 3Q07 losses. For 2007, assuming no pump-price increases, we forecast refining losses to soften to RMB9.5b, from 2006's 25.3b. This is largely due to changes in its accounting standards, which we forecast to cause its E&P EBIT to decline 28% y-y to RMB45.4b.

       Losses or gains in its refining unit continue to hinge on politics and remain opaque.

       Who we favor – big spenders and oilfield equipment Rising materials costs and tight supply of rigs and equipment globally have pressured margins of major oil companies. Immediate beneficiaries of this are energy-equipment makers. In this space, we favor COSL (2883 HK), Emer International (8149 HK), CNOOC Engineering (600658 CH), Sembcorp Marine (SMM SP) and Keppel Corp (KEP SP).

       China's oil companies have shown a fair amount of resilience, largely due to their semi-integration in upstream operations. The CNOOC group's ownership of COSL, as well as CNOOC Engineering, has played a major role in increasing the availability of materials, as well as softening the financial impact on CNOOC. CNPC's Great Wall drilling has provided similar help for PetroChina.

       In the case of CNOOC, we expect rig-rate increases this year of 15-18% y-y, which we derive from COSL's 1H07 rig-rate increases. This is significantly softer than the 50+% increases in 2006 global rig rates, and our previous forecasts. PetroChina's cost increases will largely depend upon tertiary recovery techniques in its aging fields, which were a key cost component in 2H06.

While cost pressures are a concern, stock prices are linked to new discoveries, which cannot be forecast, but can be examined by other metrics. One such metric is exploration capex against current BOE production base, indicating capital allocated to growing reserves, against current oil and gas produced. This ratio is typically higher in small- and mid-cap companies, or new companies that seek to grow their hydrocarbon asset base before redirecting capital elsewhere. By this metric, CNOOC and PetroChina's spending was about 2x ExxonMobil's and BP's in 2006.（陈宏杰博客   blog.sina.com.cn/TimesBaby） 

       How effectively is this capital being deployed? In line with recent averages, 2006 exploration success rates for BP were 40.8%, while Shell reached 44.3%. A driller's rule of thumb – 40% or better is considered efficient. PetroChina and CNOOC over the same period were 44% and 48.1%, respectively, showing some improvement from their three-year averages of 38-40%. While CNOOC did show a marked 7.7 percentage point increase, we base our forecasts on 2005's 40.4% to remain conservative.

       Effects on cash flow will be negative over the short term, as E&P cycles from discovery to production typically last five years. However, awash with cash from strong crude prices, quasi-equity "evergreen" loans (no set repayment date) from their parent companies, and upcoming A-share listings should prove adequate for fueling their robust exploration programs.

       With crude prices higher for longer, stock prices highly correlated to new discoveries, and China's oil companies showing operational efficiency on par with international players – we're long China's big spenders.