Sinopec gets upstream foothold with $2.5b deal

HONG KONG: Sinopec, Asia's top oil refiner, will buy a stake in upstream assets in Angola for $2.46 billion and said it wanted more such deals, which could shield it from high oil prices that hit margins in the fourth quarter.

Sinopec, China's No 2 oil and gas producer after PetroChina, said its unit in Hong Kong would buy 55 percent of Sonangol Sinopec International Ltd, which has deepwater assets in Angola, from its parent China Petrochemical Corp, its first acquisition of overseas upstream assets.

Analysts say upstream acquisitions by China's biggest refiner are necessary because it will continue to struggle in the first half of 2010, as Beijing procrastinates on raising state-set fuel prices for fear of stoking inflation.

"This is a long-term positive," said Gordon Kwan, an analyst at Mirae Asset Securities. "They need the upstream assets to compete with PetroChina and CNOOC. They are the most vulnerable, without guaranteed domestic prices to secure a margin. ... They would get more upstream assets to minimize their vulnerability."

Besides buying more upstream assets from its parent, Sinopec could hunt for assets in North Africa, the Caspian Sea and Latin America, Kwan said.

With the Angola transaction, Sinopec's remaining proven reserves of crude oil will increase 3.6 percent and its daily crude oil production will rise 8.8 percent, the firm said.

"This acquisition, of one of its parent's highest quality assets, marks the entry of Sinopec into the overseas upstream E&P (exploration and production) business, and forms the basis for the company to acquire future new oil and gas assets," the firm said in a statement.

Sinopec said in a separate statement that its board had proposed to issue A-share convertible bonds that could total up to 23 billion yuan ($3.37 billion) for an ethylene project in Wuhan, and for some of its refining and pipeline projects.

Higher crude

Sinopec forecast higher crude prices in 2010 and warned that more refining capacity in China could stiffen competition.

Although Sinopec's fourth-quarter profit beat expectations, its results echoed a dismal theme across the sector, dragged down by higher crude prices and low state-capped fuel prices.

Rival PetroChina said Beijing could delay fuel-price hikes as it posted a lower-than-forecast 12 percent gain in quarterly profit.

"Following the recovery in the global economy, international oil market demand has recovered. It is expected that in 2010, the level of crude prices may be higher than in 2009," Sinopec said in a statement to the Shanghai stock exchange.

Sinopec said that with new capacity from refining and petrochemical businesses coming on stream, market competition would remain keen.

In 2010, Sinopec is targeting domestic crude oil production of 44.52 million tons. It aims to process crude oil of 203 million tons and to have total domestic sales of refined products of 129 million tons.

Total capital expenditure will amount to 112 billion yuan, with about half going to exploration and production.

Crude oil prices climbed nearly 30 percent in the fourth quarter from a year earlier. While that boosted profits at Sinopec's exploration unit, China's second-largest, it sliced the firm's refining margins as Sinopec buys more than 70 percent of its crude on the global market.

Besides more fuel price hikes, Sinopec will be banking on a faster rise of the yuan in 2010, which would reduce the cost of imported crude.

For Sinopec investors, the fourth-quarter results are depressingly familiar: the firm was crippled with refining losses in 2008 due to rising crude prices and low state-set fuel prices.

Sinopec's net profit attributable to shareholders totaled 11.96 billion yuan for October-December, compared with a restated 13.46 billion yuan last year, according to a statement to the Shanghai Stock Exchange, using international accounting standards.

Analysts had expected a profit of 10.4 billion yuan, according to estimates compiled by Thomson Reuters I/B/E/S.

But for most of 2009, Sinopec, led by Chairman Su Shulin, benefited from lower crude prices and from Beijing raising retail fuel prices five times. The government last raised gasoline and diesel prices by 7 percent in November.

Shares in Sinopec have fallen about 7.8 percent this year. PetroChina has lost about 6.1 percent, while CNOOC, which reports on March 31, has risen 3.3 percent.