Hong Kong Stock Market Review: Oil stocks pull back

Oil prices hit a three-year low, leading to a global oil stock pullback. Occidental Petroleum has dropped by 10% since September, while the average decline of the three major oil companies listed in Hong Kong is 20%.

Although OPEC has been suppressing supply, there is still an oversupply situation due to weak demand. OPEC has lowered demand forecasts for the second time in two months, partly blaming China for cyclical demand weakness and structural transformation driven by new energy transition.

In fact, non-ferrous metals have already started to decline, so the oil adjustment is not surprising. The problem lies in funds clustering around high-yield stocks with overly high expectations.

With the decrease in oil prices, refining and chemical product profits are expected to rebound. However, Sinopec's stock price has also plummeted due to various factors affecting performance, including end demand, long-term contract oil prices, and foreign exchange.

In the first half of the year, under the fluctuation of crude oil prices at high levels, Sinopec's overall performance met expectations. The refining business remains weak, but the chemical business has improved. The revenue in the first half of the year was 1.58 trillion, a year-on-year decrease of 1.1%; the net profit was 35.7 billion, a year-on-year increase of 1.69%. In Q2, the revenue was 786.16 billion, a year-on-year decrease of 2.02%; the net profit was 17.387 billion, a year-on-year increase of 15.84%, and a quarter-on-quarter decrease of 5.07%.

Specifically, in the first half of the year, the operating profit of the exploration business was 26.83 billion, a year-on-year increase of 14.3%, based on a 3% year-on-year increase in the average crude oil selling price; the operating profit of the refining business decreased by 38% year-on-year to 4.3 billion, with a negative impact of 690 million coming from foreign exchange. It is expected that this impact will decrease in the second half of the year, and there may even be positive gains, but inventory losses will offset some of it; the marketing business did not perform well, attributed to weak diesel demand, a year-on-year decrease in sales volume, and an increase in the penetration rate of liquefied natural gas heavy-duty vehicles.

Both excessively high and low oil prices will affect company profits. Among the three major oil companies, Sinopec has the most complex business model, but around the 70 yuan level is probably the most comfortable range for the company.

Among the three major oil companies, Sinopec has the highest dividend payout ratio, having previously announced that it will not be less than 65% in the 2024-2026 fiscal years. In fact, the average in recent years has exceeded 70%. The company has also announced a buyback of 800 million to 1.5 billion shares on the A-share market within three months, and will also buy back shares on the H-share market. This year's return may be the highest among the three major oil companies. However, the company is burdened with a considerable amount of debt.

In comparison, the subsidiary Sinopec Engineering is relatively simple, mainly focusing on overseas projects. Although it has lent a considerable amount of money to the parent company, its financial health is good, with a similarly high dividend payout ratio. However, perhaps due to this, the current stock price has not experienced much of a pullback