Friday, March 28, 2008

Correction: Sinopec and PetroChina Likely to Participate in China's Overseas Quest for Oil

The previous article concluded that it was not very likely that Sinopec and PetroChina would participate in "China's Overseas Quest for Oil." However, this conclusion should be corrected as, from further analysis, it appears that that both PetroChina (PTR) and Sinopec (SNP) will participate in China's overseas oil quest, based on senior management's comments, as discussed below.

Sinopec's Comments Concerning Overseas Oil and Natural Gas Acquisitions:

Sinopec management has made several comments that indicate that overseas properities acquired by Sinopec Group would be transfered to the publicly listed subsidiary, Sinopec Corp (SNP). As a first example, in the First Quarter 2006 earnings conference call, the Sinopec Analyst for Citigroup Tom Hilbolt asked if Sinopec Corp would receive rights to Sinopec Group's international properties. The response by Zhang Jiaren , Senior Vice President of Sinopec Group indicated that Sinopec Corp would receive rights to overseas properties:

"As for the Sinopec Corp we haven't made our steps in the international acquisition of E&P assets, however as soon as the assets acquired by the parent company is generating stable return and risk is minimized the listed company or Sinopec Corp has the priority to buy the assets from the parent company."

More recently, a similar comment was made during the Third Quarter 2007 Sinopec Conference Call, by Dai Houliang, CFO of Sinopec Group, in a response to a question by Credit Suisse analyst Prashant Gokhale concerning Sinopec Group's ability to transfer international assets to Sinopec Corp.

"With regard to the purchase of overseas assets of the parent company, Sinopec Corp has the first right of refusal to purchase the overseas assets of the parent. But currently we have no concrete plan or proposal on that. "

In the last few months, Sinopec appears to be aiming to increase its activity in acquiring international assets. According to the article "CIC Intends to Increase Investment for Sinopec"
from the January 18, 2008 issue of the China Chemical Reporter, China Investment Corporation plans to assist Sinopec Corp in acquiring overseas assets, and specifically:

"A senior manager of Sinopec Corp. had ever expressed that the company intends to increase an investment in oil upstream business, including acquiring oil assets in overseas markets from its parent Sinopec Group. Sinopec Corp. has set its strategy to boost its oil upstream business and focus on integrated businesses with global leadership positions."

PetroChina's Comments Concerning Overseas Oil and Natural Gas Acquisitions:

On March 20, 2008, as reported by the Financial Times, PetroChina announced plans to acquire 50% of parent company CNPC's CNPC Exploration and Development, which holds most of the CNPC's oil fields abroad -- but does not include CNPC's Sudan assets, which are the subject of a campaign (Harvard, EU) to divest holdings of PetroChina by Western investors. Further, Jiang Jiemin, CNPC's and PetroChina's chairman, announced on March 20, 2008, that

"Our company now has the mission to be an international integrated energy company. We need to speed up development of overseas businesses. For our international business, the strategy is that for the existing oil fields we will stabilize production and enhance exploration for new discoveries. As for acquisitions, we will take every opportunity."

CNPC has already set a president for transferring international assets to the publicly listed subsidiary, PetroChina, as CNPC transfered 67% of its acquired PetroKazahkstan assets to PetroChina in 2006 for $US2.76Bn. The purchase price can be considered a transfer of assets in that in 2004, CNPC paid $US4.18Bn for 100% of the assets of PetroKazhkstan, so the purchase price paid by PetroChina to CNPC is actually slightly lower proportionally verses the originally purchase price by CNPC in 2004 (and it is likely that the oil assets would be worth more in 2006 verses 2004 due to the higher price of oil, which probably more than offset any depletion during the period).

Conclusion:

The net effect of the right of Sinopec and PetroChina to participate in China's overseas oil acquisitions is to make the Sinopec and PetroChina more attractive as equity holdings, as the ability to move internationally is expected to expand Sinopec and PetroChina's reserve base substantially. Note that the author will follow up with an analysis of Sinopec and PetroChina as equity investments.

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