Sinopec Buys More from Parent

Zacks

China Petroleum and Chemical Corp, aka Sinopec (SNP), intends to set up a $3 billion worth 50:50 joint venture − Sinopec International Petroleum E&P Hongkong Overseas Ltd. − with its parent company China Petrochemical Corp. or Sinopec Group  to take over the oil and gas properties held by the latter. The move in mainly intended to boost its profitability as well as extend its portfolio globally. In this regard, Sinopec is eyeing assets in countries such as Russia, Colombia and Kazakhstan.

For the latest purchase agreement, Sinopec will pay $1.5 billion and will take control of the venture. The deal will boost Sinopec's proven reserves by 9.1% to 3.1 billion barrels of oil equivalent (BBoe), and its annual crude production by 11.2% to 365 million barrels.

Sinopec has very few international oil and gas properties and hence intends to acquire the overseas upstream assets of its parent company partly to minimize the adverse effect that China's measures to control fuel price have on its results.

Sinopec Group has already spent $34 billion on several contracts in the U.K., U.S., Canada, Brazil, Argentina and Australia over the last three years. The group holds a 76.28% interest in Sinopec, which took over its parent’s 50% share in a deepwater oil asset – Angola's Block 18 – for $2.46 billion in 2010.

China has a huge energy requirement as it is the world's second-largest economy. Hence, acquisitions of oil and gas assets abroad will supply the energy needs of this enormous economy.

In this connection, it is worth mentioning that on Feb 25, Sinopec inked a $1.02 billion deal with Chesapeake Energy Corp. (CHK). This gives the second-largest Chinese energy producer a 50% share in 850,000 acres in the Mississippi Lime play in northern Oklahoma.

Again, China’s largest offshore oil producer, CNOOC Ltd. (CEO) closed its $15.1 billion acquisition agreement with Canada’s Nexen Inc. in February. This deal marks a significant milestone for CNOOC with its hold over Nexen’s biggest reserves in the Canadian oil sands.

Sinopec currently retains a Zacks Rank #3, which is equivalent to a short-term Hold rating. However, there is another stock in the oil and gas industry, YPF S.A. (YPF), which holds a Zacks Rank #2 (Buy) and appears more attractive.

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