To boost its exploration and production (E&P) exposure, China’s largest refiner and marketer of refined petroleum products, China Petroleum and Chemical Corporation (SNP), or Sinopec, is acquiring deepwater oil assets in Angola.
Sinopec is buying these assets by purchasing a 55% stake in Sonangol Sinopec International Ltd (“SSI”) from its parent – China Petrochemical Corporation – for $2.46 billion. Sinopec said that the acquisition is subject to shareholders’ approval and will be funded by internal resources and loans.
The assets are located in Angola Block 18, which possesses solid exploration potential. SSI has a 50% participation interest in this block, which is segregated into east and west zones. While the west zone is currently at the developmental stage, the east zone has been operational since late 2007, with a daily production capacity of 240,000 barrels.
Upon completion, proved oil reserves and daily oil production will be increased by 3.6% and 8.8%, respectively, the company said.
We view this transaction as a welcome development for the company as its earnings potential is heavily dependent on refining and marketing business. To run the company’s refineries, Sinopec imports nearly three fourth of its total crude oil requirement, which has negatively impacted its margins as well as bottom line in past years due to the government regulated refined-product pricing.
We believe Sinopec should benefit from these potential E&P assets acquisition, which may act as a positive share price catalyst. However, our Neutral recommendation reflects our concern relating to the company’s downstream-weighted asset base.
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