China’s state-owned pipeline giant PipeChina kicks off industry restructuring with US$460 million acquisition
- PipeChina, formed in December, pays a 43 per cent premium above the net asset value for Sinopec Kantons’ 900km Yulin-Jinan pipeline
- Daiwa analyst says the sale bodes well for the spin-off of other pipeline assets owned by Chinese oil giants
Chinese oil and gas companies surged on Wednesday after new state-owned energy pipeline company China Oil & Gas Pipeline Network Corp (PipeChina) announced its maiden acquisition worth 3.2 billion yuan (US$460 million).
PipeChina, formed in December to hold pipeline assets owned by the nation’s three state oil and gas companies, has bought a 100 per cent stake in the Yulin-Jinan pipeline from Sinopec Kantons. It is part of Beijing’s energy sector reform to incentivise domestic exploration and production investment to stem rising imports and enhance energy security.
The selling price is 43 per cent higher than its net asset value of 2.2 billion yuan, above the expected 20 per cent premium, according to Sanford Bernstein senior analyst Neil Beveridge. The price represents 19 times its net profit of 173 million yuan last year, which has fallen from 236 million yuan in 2018.
02:22
China and Russia turn on gas pipeline ‘Power of Siberia’ as they forge stronger energy ties
“The [deal] details provide positive read across for PetroChina and [sister firm] Kunlun Energy,” Beveridge wrote in a note, adding that “The pipeline [restructuring] is the most significant reform of the Chinese oil and gas industry since the IPO of the Chinese oil majors 20 years ago.”
The two firms also hold gas pipelines that are expected to be sold to PipeChina soon, which will own all of the nation’s main pipelines.
China combines three oil pipeline networks into a single operator
If the pipelines of PetroChina – the nation’s dominant gas producer and distributor – can be sold at 20 per cent above their net asset values, it could book a “special valuation gain” of around 50 billion yuan, Beveridge estimated.
Due to its market dominance, PetroChina, which accounted for 60 per cent of China's natural gas production last year, has historically prioritised its own pipeline needs and competitive considerations ahead of those of its rivals, especially those that do not own pipelines.
By breaking its stranglehold on transmission capacity, Beijing hopes to remove a major barrier for other companies to invest in oil and gas exploration and production. By acting as an independent supplier of transmission capacity, PipeChina is supposed to treat all oil and gas producers fairly on capacity supply.
“[The pipelines restructuring] will fundamentally change the way the gas market operates in China,” Beveridge said. “The business of gas transport will be separated from the business of gas selling … there will be greater competition.”
Kantons’ pipeline sale is expected to be completed by the end of September, which will allow it book a one-off gain of 966 million yuan. Serving four northern provinces, the 944km pipeline is capable of delivering four billion cubic metres of natural gas annually from fields near Yulin in Shaanxi province to Jinan in Shandong province.
Dennis Ip, analyst at Daiwa Capital Markets, said progress of Kantons’ asset sale to PipeChina had come faster than expected.
“It is likely to be a shot in the arm for all pipeline spin-off plays, as it allays market worries about value-destructive spin-off offers,” he wrote in a note.
Kantons surged as much as 12 per cent on Wednesday before closing 1.7 per cent higher at HK$3.62. PetroChina gained 4.1 per cent while Kunlun rallied 9.4 per cent. The Hang Seng Index closed 2.3 per cent lower.
Shares of Chinese oil and gas companies have surged after newly-set up PipeChina kicked off the sector's pipeline assets restructuring with an over 3 billion yuan deal at a higher than expected price.
