Good morning, ladies and gentlemen. This is Jane Lee of PR China. Welcome everyone to Sinopec Corp's earnings conference call for the first three quarters of 2017. Please be reminded that the results presentation for the first quarter of 2017 can be downloaded at www.sinopec.com. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. Now, I would like to transfer the call to Mr. Baoming Zheng, Representative on Securities Matters of Sinopec Corp. Mr. Zheng, you may begin.
Thank you again. Ladies and gentlemen, welcome to Sinopec's conference call. Presenting at today's conference call is Mr. Wang Dehua, our CFO, and Mr. Huang Wensheng, the Company Secretary, and Mr. Ma Yongsheng, Deputy Director General from the production and operation department, and Mr. Xiong Zhenguo, Deputy Director General from our financial department. First, I would like to ask Mr. Chen Yang to go through the presentation. After that, we can take your questions. Chen, please.
Ladies and gentlemen, now I will review on our performance in the first three quarters. Before that, I would like to highlight our cautionary statement. In the first three quarters, China's economy maintained a steady growth, with GDP up by 6.9%. As a result, domestic demand for oil products and chemicals grew fast, with apparent consumption of oil products up by 6.6%, and fast growth in acid equivalent consumption.
In the first three quarters, the company recorded a significant growth in business performance. We realized 1.74 trillion RMB of revenue, up by 28% year-on-year. Profit attributable to shareholders was 39.4 billion RMB, up by 31%. In the first three quarters, we adapted and optimized debt scale and structure, reduced interest-bearing debt by 8.15 billion RMB, and maintained a sound financial position. As of September 30th, total liability to total assets ratio was 42.8%.
Net cash generated from operating activities was 111.2 billion RMB. Net cash used in investing activities was 70 billion RMB, and cash used for debt payment was 50.2 billion RMB. Cash and cash equivalents reached 161.9 billion RMB, up by 13.6% compared with the beginning of the year, providing strong backup for future growth. In upstream, with low oil price environment, we maintained exploration intensity and new oil discoveries were made in Tarim basin of Xinjiang, Shaanxi basin, Shengli oil field, and the North Jiangsu basin. In Shunbei basin and Ordos basin, new gas discoveries were made. In development, we were profit-orientated, adjust development structure, and focused on cost control. In the first three quarters, production was 330 million barrels of oil equivalent, up by 3.2%. Crude production was 220 million barrels, down by 4%. Gas production was 674 Bcf, up by 21%.
In the first three quarters, we took great efforts to cut costs, with leasing cost at $16.04 per barrel, down by 7.3%. Realized crude price was $47.05 per barrel, up by 32.8%. Realized gas price was $5.26 per Mcf. E&P operating losses narrowed year-on-year and quarter-on-quarter. The segment realized a positive free cash flow. In refining, the company maintained high utilization rates. Refining throughput was 137 million tons, up by 1.3%. We actively promoted refined oil products quality upgrading under the GB VI quality upgrading plan for 226 cities in Huabei area, completed ahead of schedule. We consistently optimize our product mix, produce more jet fuel and gasoline. We optimized crude oil sourcing and allocation to lower our diesel cost. We focused on other petroleum products marketing and services, with increased sales in LPG and asphalt. In the first three quarters, realized refining margin was $9.64 per barrel.
Cash operating cost was $3.45 per barrel. EBIT was 44 billion RMB. Excluding influence from the price floor policy in the same period of last year, EBIT was up by 32.8%. In the marketing, with integrated business model and marketing network strength, we actively cope with domestic oil products oversupply and serious competition, and achieved continuous growth in sales volume. We optimize marketing structure and expanded retail of premium gasoline. We grew automotive natural gas business, accelerated gas station construction and operation. Automotive natural gas sales volume was up by 32.9%. We optimized gas station and oil product network and increased the numbers of service stations and convenience stores. We continuously promote non-fuel business scale and profitability. Its transaction value was 41 billion RMB, up by 32.3%, with profit up by 50.9%. Marketing cash operating cost was down by 3.8%, unit was 24.7 billion RMB.
In chemicals, we continued basic plus high-end development concept and increased effective supply. Based on margin and growth profit contribution, we optimized operation scheduling and facilities operations. Gasoline production was 8.53 million tons, up by 5.2%. We optimized feedstock structure and further lowered feedstock costs. We better integrated production sales, R&D, and acquisitions, and intensified higher value-added products and the production and promotion efforts. With the low inventory operation and our marketing network strength, we conducted differentiated and tailor-made marketing, providing whole process solutions and value-added services. Chemical sales volume was 48 million tons, up by 14.1%. Chemicals demand was robust and gross margin was strong. By optimizing product mix, feedstock, and facility structures, we realized relatively high profit. Chemicals EBITDA reached 23.4 billion RMB, up by 22.1%.
For CapEx, focusing on transformation of growth pattern and structural adjustments, as well as improvement of quality and efficiency, and upgrading of operation, the company optimized capital expenditure arrangement for 2017, which is adjusted from 110 billion RMB to 98.5 billion RMB, down by 10.5%. The CapEx in the first three quarters was 29 billion RMB. E&P was 10.9 billion RMB. Refining was 8.5 billion RMB. Marketing and distribution was 5.3 billion RMB, and chemicals was 3.7 billion RMB. That is all for the presentation, and then the management will take your questions. Thank you.
Ladies and gentlemen, this concludes the prepared remarks for today, and we are now ready for questions. If you would like to ask a question, please press 01 on your cellphone keypad. If you want to cancel a question, press 02.
Our first question is Scott Darling from JP Morgan.
Good morning, gentlemen. Thank you very much for the presentation. I will start off with the most obvious question, is around your marketing business, which everyone is talking about. Could you just tell the market, what are you seeing in terms of your retail business? Why profitability weakened? Are we at the end of this retail price war? Thoughts around that would be very helpful and certainly any detail you can give. And obviously on the IPO, any sort of visibility on timing, I suspect it is more like a 2018 event. That was my first question. The second one on CapEx cutting. I can understand on E&P, but around chemicals, I mean, the cycle is particularly strong. Is this actually delaying calls for chemical projects? If you could give some insight there. Then my last question is around E&P business.
Have we started to see this business possibly get towards breakeven, especially as we have seen rising oil prices recently? Thank you.
Thank you for your three questions. I would like to take these three. First of all, regarding the marketing. The margin was low in the second quarter and have been improving the third quarter. On the gasoline side, we have seen very strong momentum both in demand and keep the stable margin in that area. We are happy to see the diesel margin have been improved. Because the economic growth very healthy, we expect that we can keep this marketing momentum. In terms of IPO of the marketing business, the company have announced that they have got approval from the shareholder, and they are going through the procedure of approval. So you are right, it is very hard to complete this potential IPO in this year. It is probably in next year, I believe.
In terms of your second question for the CapEx area, we have been cutting the CapEx.
All of our business, except the marketing business. On the Upstream side, because of this low crude price scenario, as well as the postponed construction of the capacity in unconventional, so the CapEx have been cut by some CNY 5 billion. In the refining and the chemical area, chemical is mostly because of the cost savings for the existing construction, as well as slightly postponed some of the construction because of the strict environmental control by the central government. But these do not have any significant impact on our planned project. For the E&P area, we have seen the crude have been escalated. Today's Brent has been above $6 US per barrel. It have been eventually in the area of our break-even area of the upstream side.
But we notice that our realized crude is in track with import parity of the Dubai price, still have some difference with Brent. But anyway, with this escalated crude price, we can see the upstream side, the performance will improve. Even in the first nine months, it suffered a loss. From the overall cash flow point of view, it has been making the break, have been the positive cash flow. Thank you.
Thank you. Next question is Lu Wang, Citigroup. Please go ahead.
Hello. Hi, good morning. Thanks for the call. Just a follow-up question on your marketing business. Could you give us more details based on October numbers? Are these crude prices and discounts getting better or getting worse? Also, what is the overall trend in the 4Q. Thank you.
Actually, for the marketing, if you are traveling in China, you can hardly find any discount from our petrol stations for the gasoline side. But in some area, like in Shandong Province, in Hebei Province, as well as in Shanxi Province, we have some on-sale promotion for the diesel side. This is trying to help to boosting the consumption area. Even starting from July 1st, those normal diesels have been put in line with those diesels for the vehicle, and the government gave the rise for the diesel, and we have to de-stock off those area. We have been working in that area, and today we have seen the discount for the diesel have been improved significantly. We have expected even a stronger demand in the fourth quarter in diesel side, as well as we expect there is a stronger margin in that area.
Thank you.
Thank you.
Next question is Neil Beveridge from Bernstein.
Hey, good morning. Thanks very much for the presentation. Just a couple questions from me. Firstly, on refining, we have seen a really significant pickup in demand in the third quarter. Can you give us a bit of color of, say, how you are seeing the market in Q4, whether or not you are seeing that demand strength continue, and how you think it will impact margins as we move towards the end of the year? The second question is really around the CNY 161 billion in cash and cash equivalents. I know you cannot talk about specific deals that you are looking at, but in terms of how the company is thinking of deploying that capital, what sort of areas that you are looking at, it would be good if you could provide some of your latest thoughts on how you are thinking about that.
Thank you for your question. I would like to take your first question, and we have been repeating several times, but I would like to leave the second question with our CFO, Mr. Deh ua, to give you the answer. For the first question, in the first three quarters, we have seen strong momentum in terms of demand. The gasoline demand growth by some more than 10%, and the jet fuel demand more than by 11.5%. We are happy to see the diesel demand have been growing by some 3%. We expect in the fourth quarter, this area in the gasoline and in the jet fuels can keep the momentum. We can see the positive growth in the diesel side. So the margin area, given that the government will stick with its current policy on the products price mechanism.
We expect we can have a good margin. That also should thanks for our mixture mix have been improved. We have produced more gasoline. We also have been produced all higher octane number of the gasoline. Sometimes those products, apart from the gasoline, diesel, and jet fuel, like the LPG, like the asphalt, like the crude price, also be in good shape, and we can expect the margin can keep this momentum.
The second question, please, Ms. Mule please help to translate into the Chinese first.
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Okay. We may have two usage of the cash. The first is considering the current CapEx plan and the structural adjustments according to the company's 13th Five-Year Plan and the company strategies. The next step, we would like to keep the exploration activities for the upstream segment, and at the same time to keep the investment for the downstream business, especially for the refining and chemical segment, the four centralized hubs investment. The second usage is to increase the company's payout ratio. For the following years, our profitability continues increased. At the same time, our payout ratio gradually increased, and the payout ratio was higher than 50% for the company. In the future, we will continue this trend to keep our payout ratio at the current level. Thank you.
Next question is Eddie Huang, Morgan Stanley.
Thank you. I have a question regarding the national gas pipeline. There's a talk that the government is thinking about having the national pipeline company being established. I want to ask the management what's our strategy on this development. We consider to actually support this national movement this development. What's the financial impact to our company? Especially, I think we know that the company has some 50% stake to China Life proposing for one backbone pipeline. What about the other pipeline, especially for the connection pipeline at the group level or this core level? Thank you.
Thank you. I would like to take this question. Some of the people talking about the national pipelines, that is a part of the restructuring in the industry for the energy area. As Sinopec is a major player in this area, we are very supportive for this initiative as long as the government give us the clear guidance. At the moment, we have yet to receive any clear guidance on how to perceive these kind of activities. But for my understanding, based on the 19th Party Congress, the phase will follow the market-related existence, and all those transactions should be market-based. If that is the case, under the existing pipelines, the company is going to be reevaluated, and this kind of transaction should based on revaluating the assets, giving these assets part of listed company.
You can take a reference of the previous transaction we have been made with the China Life transactions. If they saw the transactions, they can increase the value of the pipeline, and it can be equity for the performance for the specific year when they make these transactions. I have to take this very positively. At the same time, we can share all the existing pipelines in China to transport of gas to our designated markets. It can be helpful for our upstream exploration on the production in the natural gas area. Thank you.
Our next question is Lawrence Lau, BOCI.
Hi, morning. I just have a simple question. I just want to double-check if you have made any further impairment loss in the third quarter. If yes, from which segment, please? Thank you.
Yes, I would like to have CFO Mr. Xiong Zhenguo to give you the answer.
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For third quarter's impairment, we mainly focus on the refining segment and chemical segment. For refining segment, because of continuously intensified adjustment for product and feedstock, and to fitting the competition and the further strengthened environment requirement from the government, some of the refineries in Henan Province have shut down, and also some non-profitable lubricating oil facilities have been disposed. For chemical segment, we mainly focus on the oversupply of the facilities, such as some of the polypropylene facilities went through the impairment.
Thank you.
As a reminder.
Please go ahead. As a reminder, please press 01 on your telephone keypad now to ask a question. Our next question is Aditya Sircar from Macquarie. Aditya, please go ahead for your questions.
Yeah. Hi, thank you. Just on the domestic gas production that's tracking above expectations. Can you give us your latest thoughts there and any guidance on your margins for your gas volumes versus domestic oil? Thank you.
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I would like to have Mr. Wu of upstream business to give you an answer.
Thank you.
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For the first three quarters, the natural gas production has outpaced the supplies. It is mainly because this year's market demand was really robust compared with the same period of last year. Our upstream natural gas fields increased their production in order to supply the market demand. The next step, we will follow the market demand trend and keep our upstream segments to fulfill their productions to guarantee the winter season demand for natural gas. The fourth quarter of this year will be another strong year given the seasonality issue, as well as an issue of a lot of the coal power having been shifted to the gas-based power and even stronger. We expect that the fourth quarter will be even stronger, and we are working hard to further improve and increase our natural gas productions from the existing oil field. Thank you.
Thank you. Can you also comment on the margin for these gas volumes?
We have the margin for the conventional and unconventional. The margin for the RMB base is around RMB 0.1 per cubic meter. Thank you.
Thank you.
Our next question is Theo Hardijawa from JP Morgan. Please go ahead.
Hi. Yeah, thank you for taking my call. I have two questions. The first one is related to the balance sheet structure. In terms of the levers, I think it has improved quite a bit in the last year or so. Any thoughts in terms of what credit ratings and leverage metrics that you'd like to maintain? That's my first question.
Go ahead with your second.
Yeah. Second question is in regards to the previously announced South African and Botswana transaction. My understanding is that Sinopec didn't proceed with the transaction. I am curious on your thoughts, in terms of future plans in Africa. Thank you.
I would like to take your second question first. Then Mr. Dehua Wang is able to give you an answer on our leverage issue of your first questions. For the South Africa deal, we have announced, but recently we received a notice from our partner, Chevron, who is a majority shareholder of that company, who want to sell their stakes to us. The notice is saying the minority shareholder would like to exercise their first right of refusal. We have the designated team to follow this project and follow the procedure of the government approvals. If that is the case, we are going to look at the other potential opportunity, or we can go ahead with the project. So it really depends on the final government approval issues. Thank you.
For the total debt to total asset ratio, currently our current level is roughly 43%, reduced 2 percentage points compared with the beginning of the year. It is mainly because of considering the strong profitabilities and the returns of the company, as well as a strong cash flow. We would like to keep our financial statement healthy. The range of the company's leverage is roughly 50%. So the next step, we will be considering the Thirteenth Five-Year Plan and company strategies. Our leverage might increase, but still maintain roughly 50% level. Thank you.
Our last question is Thomas Hilboldt from HSBC. Please go ahead.
Thank you very much. Good results, and well done. I am wondering if you could just give us some guidance on gas prices. They diverged very materially from the increase in the oil prices. The gas price actually fell a little bit. I am wondering if you can give some context to that. Secondly, just on the marketing business, you have gone very quiet on the non-fuel side of the business. Really not much commentary at the half or otherwise. Can you give us an update there, whether that is still a viable way for you to apply capital and what the results are and the growth rates and the operating profitability? Finally, just to clarify on your dividend statement. You have paid out above 50% earnings this year, and then converted at the interim back to this low to mid 40% payout ratio.
Can you please clarify when you say maintain current payout, are you referring to the low 40 or above 50%? Thank you very much.
Thank you, Tom. I would like to have Baoming Zheng to give you the answer for the first two questions, and then I would like to take your third question.
For your first question, sorry, I did not really pick up clearly.
Please repeat.
Gas prices diverging from oil prices falling instead of rising.
Well, actually, our gas prices are quite stable in RMB terms. The falling in gas prices is mainly due to the exchange rate. In absolute terms, compared with our peers, we are still higher. You can see that in absolute terms, our realized gas price is slightly higher than our peer, and that is the normal condition.
I would like to give you, we are saying that while announced of the gas realized price is wellhead price is a big difference with our other peers is the wellhead. The wellhead is a bit higher than our major other players in the region. Go ahead.
For the second question on non-fuel business, we will continue to invest in the non-fuel business, you can see that the transaction and also net profit, or the net profit from the non-fuel business, is rapidly growing. The strategy here is that we are trying to make our own brand commodities, like the water and also other commodities selling in our convenience stores and also some liquors. We use our own brand. In this case, we can guarantee the quality of the goods we sell in our convenience store and also attract more customers. The other terms, the other aspect of the non-fuel business, we are trying to enter the internet plus business, you can see that recently we have signed the strategic agreement with other internet companies or internet-selling companies.
In the future, we will continue to invest in the non-fuel business and try to expand both the sales and also net profit. Thank you.
In terms of the capital deployed, the Zapi area is not very cash-consuming area, actually. We major leveraging our existing networks as well as the platforms to provide more services to our C stores, as well as provide some services starting from online business. The Zapi area do not need deploy the significant cash. For your third question, it is supposed to be the last question today. Just now, the CFO, Mr. Wang, give you the answer for the dividends expectations. In the past decades, if you look at the company, our dividend pay level is in the mid of the 40s. Two years ago, we start from the mid of the 50s, and last year, we paid some 65. Today, as you may notice that our cash flow is very strong. We have a lot of cash in hand, and we have some development plans.
We also have some consideration on increase the shareholders value. As a management team, we are going to considering rebalance this cash flow, the cash, as well as the development. We have a strong intention to pay at a relatively high level, but it is subject to final approval by the board as well as by the shareholder. Thank you.
This is the end of question and answer session.
Okay, ladies and gentlemen, thank you for attending Sinopec's conference call. If you have any further questions, you can contact our investor relations department. Thank you and good night.
Thank you.
This concludes our conference call. You may disconnect now. Goodbye.