China Petroleum and Chemical Corporation
), also known as Sinopec, plans to acquire some of its parent
company's - Sinopec Group - overseas upstream oil and gas assets.
The assets would be acquired once the parent company is through
with its restructuring exercise and their evaluation.
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The purchase forms a part of the company's strategy to obtain
hydrocarbon reserves and expand its business to reduce the effect
of oil price volatility. The chairman of Sinopec said that it will
need financing from external sources to fund the transaction. No
other particulars concerning the schedule or other details about
the proposed purchase were revealed by the company.
Sinopec recently reported first half 2012 net income of 24.5
billion yuan (US$3.87 billion) and earnings per share of 0.272 yuan
($4.30 per American Depository Share [ADS]), both down
approximately 40.5% and 41.1%, year over year, respectively.
The company's performance was affected by the slump in prices of
domestic fuel products in the second quarter and a sluggish
economy, which resulted in weak demand for chemical products.
Moreover, Sinopec's downstream refining segment operations were
also hit by government restrictions on passing the price hike to
Owing to rising raw material prices and domestic price ceiling on
refined products, Sinopec is keen on buying assets abroad. Sinopec
obtains majority of its revenue from downstream activities unlike
PetroChina Co. Ltd.
), whose activities are concentrated in their upstream operations.
Recently, the Wall Street Journal reported that Sinopec Group is
looking to purchase an equity stake in the $2.5 billion Texas clean
energy project. Total investment, along with contributions from
Chinese banks, is estimated at a maximum of $1 billion.
Should the transaction go through, it will be one of the biggest by
a Chinese company in the U.S. power sector. The deal is expected to
be announced in September this year with full financial details and
the size of the stake.
Sinopec Group hopes to gain experience in carbon dioxide flooding
through this project, which will enhance its output while
extracting oil. Therefore, the company's quest to purchase assets
abroad will enhance its oil and gas yield and help to mitigate the
increasing loss from gasoline and diesel sales at state-controlled
Sinopec holds a Zacks #4 Rank (short-term Sell rating). Longer
term, we are maintaining our Underperform recommendation on the