Analysis: Parent asset injection no panacea for Sinopec woes

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HONG KONG (Reuters) - Chinese state oil giant Sinopec Group may inject only as much as half of its global oil and gas reserves into Sinopec Corp (0386.HK) as it holds onto assets in volatile countries such as Syria, far from enough to cut the unit's exposure to unprofitable refining at home.

Fu Chengyu, who became chairman of both companies a year ago, said last month that China's largest refiner was seeking to buy more overseas upstream assets from its parent to boost oil and gas production and counter mounting losses from selling gasoline and diesel at state-controlled prices.

Sinopec Group has spent at least $32 billion buying global assets in the last three years, including the $7.24 billion purchase of Swiss explorer Addax Petroleum Corp in 2009 to gain access to fields in West Africa and Iraq's autonomous Kurdistan region. That was China's biggest overseas acquisition ever.

At least half of the group's overseas assets are in countries such as Syria, Argentina and Russia, where the reserves are either of poorer quality, too small or in areas fraught with high political risk, analysts say.

"They will inject the ones that are not contentious. So they are not going to inject Syria, Iran and all of that," said an energy banker with an international bank in Hong Kong.

Investment banks have been pitching for mandates to handle the asset injections, said the banker, who requested anonymity because he was not authorized to speak to the media.

Sinopec made its first, and so far only, acquisition of overseas upstream assets in 2010 when it bought deepwater oilfields in Angola from its parent for $2.46 billion.

The parent's assets in North America, Brazil and Australia, and some of the assets held by Addax, may be targeted first, said Scott Darling, director of Barclays Capital's Asia oil and gas research.

"I think it would be done on a piecemeal basis over a number of years," he said.

Sinopec's spokesman Huang Wensheng declined to comment.

The parent's global upstream assets in total may boost Sinopec's oil and gas production by 40 percent to about 1.5 million barrels per day (bpd), according to analysts. The unit has a daily refining capacity of 4.4 million barrels.

Sinopec Group holds around 2.2 billion barrels of oil equivalents (boe) of overseas proven reserves, they say.

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Comparison of Sinopec, PetroChina and CNOOC's reserves, production and refining capacity

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China's crude imports

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LOSSES FROM REFINING

Sinopec reported net profit growth of 2 percent last year, lagging behind the 29 percent gain posted by Chinese offshore oil producer CNOOC Ltd (0883.HK)(CEO.N), which doesn't refine crude oil.

Sinopec had a refining loss of $5.9 billion in 2011 as increases in state-regulated fuel prices failed to keep pace with gains in world crude prices. Refining and sale of oil products accounted for 59 percent of Sinopec's operating revenue last year.

The refining division may post a loss of 8 billion yuan ($1.27 billion) in the first quarter, Deutsche Bank said in a note, adding that the company's net income may drop to 0.196 yuan per share from 0.238 a year earlier.

Sinopec is scheduled to report first-quarter earnings on Thursday.

Shares of Sinopec have underperformed PetroChina (0857.HK)(601857.SS)(PTR.N), the country's dominant oil and gas producer, and CNOOC in recent years.

"That was China's biggest overseas acquisition ever.At least half of the group's overseas assets are in countries such as Syria, Argentina and Russia, where the reserves are either of poorer quality, too small or in areas fraught with high political risk, analysts say."They will inject the ones that are not contentious"The stock has also been trading at a discount to its peers.

Sinopec was created in 1998 after a sweeping restructuring that carved up China's onshore oil industry into two broad areas.

The north and west of the country went to China National Petroleum Corp (CNPC), PetroChina's parent, while Sinopec Group was responsible for developing areas in the south and east. Northern and western China is rich in oil and gas, while China's south and east are comparatively poor in energy resources.

Sinopec Corp's proven reserves stood at 3.97 billion boe at the end of 2011, nearly all of which are in China. That was less than one fifth of PetroChina's total proven reserves of 22.82 billion boe.

Sinopec's 2011 oil and gas output was only one third of PetroChina's 1.29 billion boe, while its refining capacity of 4.4 million barrels per day is about 60 percent bigger than PetroChina's 2.7 million bpd.

Sinopec Group has said it plans to boost its oil output from overseas projects to over 1 million bpd by 2015 from 2011.

Unlike PetroChina and CNOOC, which have been the main vehicles driving overseas acquisitions for their respective groups, global asset purchases for Sinopec are mainly carried out by the parent.

CNPC set up a 50/50 joint venture with PetroChina in 2005, injecting half of its overseas assets into PetroChina through the venture.

ASSET INJECTION

Sinopec's Fu told reporters last month that the overseas upstream assets to be transferred to the listed vehicle were being evaluated. Only when assets become profitable will they be injected into the listed company, he said, without giving details.

The group's overseas proven reserves included 185 million boe in Syria, 200 million boe in Argentina, 550 million boe in Russia and 590 million boe of mostly unconventional assets such as oil sands in Canada and shale gas that cost more to develop, said James Hubbard, head of Asia oil and gas research at Macquarie, citing internal estimates and data from Wood Mackenzie.

In Syria, a popular uprising against President Bashar al-Assad has sparked violence that killed more than 9,000 people over 13 months.

Russia imposes high taxes on oil and gas producers, while the nationalization of Repsol's Argentine oil and gas unit YPF is making investment in the South American country's oil assets less alluring.

Sinopec Group's overseas reserves would still appeal to investors as they hold growth potential, said Barclays' Darling. He estimated that the group has a resource base, including proven and probable reserves, of 4.7 billion boe.

"What investors like is the exploration bit.

They like resource upside or exploration upside," Darling said, adding that Sinopec Corp was likely to fund future acquisitions of assets from its parent with overseas bond issues. ($1 = 6.3085 Chinese yuan)

(Editing by Ryan Woo)

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