There's Nothing Refined About Sinopec's Results

These are boom times for energy producers and tight times for refiners, but for integrated energy giants it's a whole lot of both.

Nowhere is that more evident than in China, where government-mandated price caps on fuel products have literally torched the once-formidable earnings of China's integrated energy conglomerates. China Petroleum and Chemical (NYSE: SNP  ) -- better known as Sinopec -- issued earnings results for the first half of 2008 that show refining oil is a losing proposition under this managed price structure. Sinopec's bottom line took a 77% nosedive from the first half of 2007.

Management expects continued high oil prices and pressure on the refining business for the remainder of 2008. Still, Sinopec and rival PetroChina (NYSE: PTR  ) may see some relief in the second half from a fuel price hike issued in China in June, and it wouldn't be a shock to see the Chinese government continue to lighten energy subsidies.

Zooming out, Sinopec reports that GDP in China rose 10.4% in the first half, and domestic consumption of refined oil rose 13.9%. For Fools who remain long commodities despite the recent sell-off, this provides welcome confirmation that a key source of global demand growth remains intact.

I have tracked the tribulations of U.S. refiners like Valero (NYSE: VLO  ) and Tesoro (NYSE: TSO  ) in their struggle to maintain profitability through a very difficult operating environment. Meanwhile, my Foolish colleague David Lee Smith has followed the burden from refining on the results of global energy leaders like ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) . As long as shares of sour crude specialists like Valero or big-hitters like ExxonMobil are available in a world free from price controls, there's no way I'm seeking exposure to refining inside the Great Wall of China anytime soon.

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Fool contributor Christopher Barker captains yachts and writes about stocks. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Valero and PetroChina. The Motley Fool has a disclosure policy.


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