Shares in Chinese oil titans gain on pipeline sale prospects
Offloads should help the energy giants pay down their project debt and fund new ones, say analysts
Shares in China’s state-backed oil and gas giants have risen, on the expectation that both China Petroleum & Chemical (Sinopec) and larger rival PetroChina are set to gain from selling off stakes in their pipeline networks.
The offloads would help the energy giants pay down their project debt and fund new ones, analysts said.
“While we are not surprised Sinopec might monetise its pipelines, we believe the implications are far more significant for PetroChina,” Jefferies head of Asia oil and gas research Laban Yu wrote in a note on Tuesday.
“This pipeline is pretty much all Sinopec has, compared with PetroChina’s pipeline segment, which has an asset value of US$87 billion.”
PetroChina, the nation’s largest natural gas producer, importer and distributor, controls the majority of the nation’s gas pipelines and reserves.
Sinopec Tuesday closed 0.9 per cent higher at HK$5.62 while PetroChina surged 5.3 per cent to HK$5.76.
Sinopec said late on Monday it has agreed to sell half of the natural gas pipeline linking its fields in Sichuan province and markets in central and eastern China, for 22.8 billionyuan.
China Life Insurance, the nation’s largest life insurer, will buy a 43.86 per cent stake, while SDIC Communications, an infrastructure unit of central government-backed investment firm State Development & Investment Corp, will purchase 6.14 per cent.
“There are not many [current] investment choices for China’s fund management firms, as property prices are elevated and the domestic stock market is lacklustre,” Nomura head of Asia oil and gas research Gordon Kwan told the Post.
“Beijing’s setting of a return cap of 8 per cent on gas pipelines earlier this year has provided the return visibility that pipeline investors would be looking for.”
Similar to one-off accounting gains booked by PetroChina over the past few years, Sinopec is expected by analysts to book a gain on its sale.
The gain is typically the difference between the valuation implied by the sale, and the pipeline’s accounting book value, usually the construction cost.
Sanford Bernstein senior analyst Neil Beveridge tipped the gain for Sinopec to be 13 billion yuan, in a note.
Beveridge said the implied value of the pipeline company is 45.6 billion yuan, which is the sum of Sinopec’s pipeline assets valued at 22.8 billion yuan, and 22.8 billion yuan of cash to be contributed by the new investors.
This represents 20 times the pipeline firm’s earnings, higher than the 17 times multiple fetched by PetroChina in its West-to-East pipelines, he added.
In 2013, PetroChina recorded a 24.8 billion yuan one-off gain after it offloaded 50 per cent of some of its key West-to-East gas pipelines to Taikang Asset Management and Beijing Guolian Energy Industry Investment Fund.
In this year’s first half, PetroChina booked a 24.5 billion yuan gain from the sale to central government-owned China Reform Holdings, of a 50 per cent stake in a firm that owns its gas pipelines linking northwest China to Central Asia.
“We believe PetroChina intends to sell down [the rest of] its pipeline network over the next two years,” Beveridge wrote.