Sinopec sticks to overseas buying strategy

Oil and gas giant will continue to acquire overseas assets from parent to boost income as domestic fuel price controls squeeze profits

PUBLISHED : Tuesday, 26 March, 2013, 12:00am
UPDATED : Tuesday, 26 March, 2013, 5:18am

China Petroleum & Chemical (Sinopec) will continue to buy its parent's overseas assets to boost earnings after domestic fuel price controls stymied its profitability.

The country's second-largest oil and gas producer has agreed to contribute US$1.5 billion cash towards a US$3 billion venture equally owned between Sinopec and parent China Petrochemical.

The joint venture will buy from China Petrochemical 50 per cent of an oil and gas producer in Kazakhstan, 50 per cent of another in Colombia and a 49 per cent stake in a third producer in Russia.

"We will stick to our strategy to acquire our parent's oil and gas production, refining, chemical and fuel-trading businesses when they are mature and beneficial to both Sinopec and the parent," said Sinopec president Wang Tianpu.

We will stick to our strategy to acquire our parent's oil and gas production, refining, chemical and fuel-trading businesses
Sinopec president Wang Tianpu

Sanford Bernstein senior analyst Neil Beveridge said in a research note that this could be the first of several deals for Sinopec to beef up its oil and gas exploration and producing assets, given that the parent had bought over the years about US$35 billion worth of such assets overseas.

Beveridge said the three stake purchases would raise Sinopec's proved oil and gas reserves by 3.2 per cent to 4.09 billion barrels of oil equivalent and its annual output by 4.2 per cent to 445.8 million barrels.

Wang said the deal would boost Sinopec's earnings per share by 2.2 per cent. The stock rose 2.7 per cent yesterday.

He said setting up the joint venture would reduce the financial pressure on Sinopec, whose net debt-equity ratio surged to 40 per cent at the end of last year from 31.6 per cent a year earlier.

On Sunday, Sinopec posted a 12.8 per cent fall in net profit to 63.88 billion yuan (HK$78.95 billion) for last year, 1.9 per cent ahead of analysts' estimate.

Operating profit from oil and gas production fell 2.2 per cent to 70 billion yuan, as a 4.9 per cent rise in output was met with flat average selling prices and an 8.9 per cent increase in cash production cost to US$17.51 a barrel. It aims to raise oil and gas output by 1.9 per cent this year.

Oil refining operating loss narrowed to 11.4 billion yuan from 35.78 billion yuan. Wang said refining profitability would improve this year if Beijing implemented a plan to bring domestic fuel prices closer to international levels.

Sinopec aims to lift refining throughput by 7.5 per cent this year after a 1.8 per cent rise last year.

While Sinopec may have to invest more than 16 billion yuan annually to upgrade its refining facilities in the next few years, Wang said the firm would negotiate with Beijing to let it charge more for higher-quality fuel to offset the spending.