China Petroleum & Chemical (Sinopec) is being constrained in its quest to buy its parent's overseas assets.
Its high debt burden and tight cash flow amid adverse market conditions mean that will not happen any time soon, Sinopec's chairman says.
For the country's second-largest producer of oil and gas, acquiring any significant overseas oil and gas production assets from parent China Petrochemical would inevitably raise the firm's debt ratio, Fu Chengyu said.
"If Sinopec is to buy its parent's overseas upstream assets, Sinopec's current cash flow position would have difficulty supporting such a move," he said.
"To do this, we would need more financing, which would add to Sinopec's debt ratio."
Fu said that while oil and gas companies tended to have a debt ratio of 30 to 70 per cent, Sinopec had set a limit of 60 per cent on its debt ratio.
According to a research report by United States-based brokerage Sanford Bernstein, Sinopec's ratio of debt to shareholders' equity jumped to 59 per cent at the end of June from 46 per cent at the end of last year, and its cash and financial assets that can be readily turned into cash totalled 12.6 billion yuan (HK$15.37 billion), down from 24.6 billion yuan at the end of last year.
"While we remain fundamentally attracted to [Fu's] strategic direction of growth … we fail to see how these plans can be financed without some form of dilution to existing shareholders given the current level of [debt] gearing," Sanford Bernstein senior analyst Neil Beveridge wrote.
Fu said last year that Sinopec planned to acquire its parent's overseas assets to address its lack of upstream oil and gas producing assets, so as to dilute the negative impact of state fuel price controls on its bottom line.
Yesterday he said Sinopec would buy its parent's overseas assets only if it helped shareholders in terms of cash flow and earnings per share.
On the development of shale gas resources in China, Fu said progress would be slower than in the US, where technological advances after more than a decade of research allowed the previously hard-to-reach resource to be extracted profitably on a large scale a few years ago.
To support his view, he cited more favourable geological conditions, such as shallower accumulation of the resource in the United States compared with China; more developed pipeline facilities in the US; greater difficulty in acquiring land for exploration on the mainland; low gas prices arising from the mainland's state-directed pricing; and greater investment in exploration in the US.
"Shale gas will be in an early stage of development in China for the next five years," he said.