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Chevron to Sell South Africa Assets to Sinopec for $900M

Zacks Equity Research

California-based integrated energy company Chevron Corporation CVX is set to divest its stake in its South Africa business to Asia’s largest oil refiner, China Petroleum & Chemical Corporation SNP, which is better known as Sinopec. With the deal, Sinopec will secure its first major refinery in the continent, keeping in line with its aim to expand in international markets.

Last year, Chevron had stated its intention to unload 75% interests in its South Africa assets as part of its three-year divestment goals announced in 2014. In Oct 2016, many energy firms like France’s integrated oil and gas major TOTAL S.A. TOT, Switzerland- based diversified resource company Glencore PLC GLNCY and Russian oil trader Gunvor Group Ltd had put in bids to snap up stakes in the Chevron’s South Africa business. However, Sinopec was selected due to the better terms and conditions it offered.

Details of the Deal

Per the deal, Sinopec will acquire 75% controlling stake in Chevron’s South Africa and Botswana assets including a 100,000 barrel per day oil refinery in Cape Town, a lubricants plant in Durban and a network of around 820 gas stations. The remaining 25% interest will be owned by local shareholders.

The deal is valued at $900 million and is subject to approval by regulatory authorities.

Sinopec will continue with Chevron’s Caltex brand name for the retail fuel stations for around five years till it forms a rebranding strategy.  The company will also be making technological upgrades at the acquired assets to meet local demand and drive growth of the indigenous oil industry.

Objectives of the Deal

The deal is well aligned with Chevron’s $15 billion divestment program announced in 2014 as the company is focusing on balancing its global portfolio with its long-term business priorities. It will help Chevron to slash costs and streamline its business models amid plunging oil prices. 

The state owned Chinese company Sinopec had invested around $6 billion in downstream business in many countries across the world in the last five years. If this deal gets finalized, it will mark the company’s foray into South Africa, which provides a large and growing market with proper regulatory framework for import parity pricing. The deal will enable Sinopec to increase its market share and revenues in the fuel retail market. Moreover, the overseas deal will help the company to hedge its bets on China’s economy as the country is witnessing declining oil demand and is shifting its focus to other less-energy intensive sectors for growth.

Zacks Rank

Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.

Chevron has outperformed the Zacks categorized Oil & Gas-International Integrated industry over the prior six months. During the aforesaid period, shares of the company rallied almost 9.7% while the broader industry gained around 7%.

The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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