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China's Biggest Oil Refiner Refocuses on Exploration -- and Profit

Stocks in this article: CVXPTRSNPXOM

This was evident in Sinopec's annual results. In 2012, Sinopec's exploration and production segment reported an operating margin of 27.2%. On the other hand, its marketing segment, which was the biggest contributor to sales, operated with a margin of just 2.9%.

In its most recent results for the nine months ending in September 2013, Sinopec revealed that its marketing segment was responsible for 35% of its operating profits. On the other hand, its exploration and production arm contributed 60% to the company's operating profits.

By divesting from the lower-margin business and investing in the higher-margin operation, Sinopec can considerably improve its profitability in the future.

Meanwhile, analysts have speculated that PetroChina might accelerate its divestiture program in response to Sinopec's sale. However, PetroChina will mainly focus on selling its infrastructure assets as, unlike Sinopec, PetroChina's oil marketing operations consist of fewer and less lucrative retail outlets. In mid-2013, PetroChina revealed that it owns more than 20,000 gas stations.

Furthermore, Sinopec says that by working with private investors with experience in the oil marketing business, the marketing segment will become more efficient in the future.

In short, Sinopec's decision to increase its focus on exploration and production by divesting from marketing makes a lot of sense.

The potential buyers of the stake in Sinopec's marketing segment would be looking at the segment's ability to generate a lot of revenue from its huge network of gas stations. The oil and gas retail business is considerably less capital-intensive than the exploration, production and refining businesses. This makes the retail business more attractive for the private sector. Furthermore, unlike the chemicals segment, the market business remained profitable throughout 2012.

Another advantage is that Sinopec's retail segment is already integrated with Sinopec's enormous refining segment.

Analysts have also highlighted the fact that Sinopec's 30,000 gas stations are seriously undervalued. With the new investment, these stations, and the retail shops on them, can be revamped. That could improve their profitability.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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