Chinese oil companies eye more deals, rapid expansion

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A Sinopec worker performing duties at a field in Langzhong country, Sichuan province. Just over a year ago, Beijing awakened to a technology revolution that has unlocked massive reserves of gas trapped within shale rock formations in the United States. China's confidence has been bolstered by a new report of its estimated reserves of shale gas, which shows them to be, by far, the largest in the world. Photo - REUTERS

Solid first-half profits at China?s state-owned oil companies have paved the way for further expansion overseas as the country?s oil needs continue to rise.

China Petroleum & Chemical Corp. (Sinopec), the world?s second-largest oil refiner, said on Sunday it intended to raise up to Rmb50bn ($7.8bn) through the sale of bonds and convertible bonds to fund projects, boost working capital and pay debts. The instruments will be issued or placed with existing shareholders, Sinopec said.

The fundraising plan accompanied the company?s announcement of a 12 per cent rise in net profit, to Rmb41bn, in the first half of the year, beating analysts? expectations.

Results were rosier still for offshore producer Cnooc, which reported first-half net profit of Rmb39bn, up 51.4 per cent, despite production disruptions from a recent oil spill.

PetroChina, the listed subsidiary of China?s largest oil and gas producer CNPC, reported net profit of Rmb66bn ($10.34billion) for the first half, up 1 per cent from last year, the weakest profit growth among its peers. Profits at both PetroChina and Sinopec were dented by Beijing?s price controls on fuel, which capped gasoline and diesel prices this spring even while Brent soared above $120 a barrel.

Analysts agreed Chinese oil companies were likely to sustain their interest in overseas acquisitions as they seek to grow their production base.

?They are always looking,? said Graham Cunningham, analyst at Citi. ?Especially if oil prices come down, all three of the Chinese oil companies are going to be in the market for M&A.?

MERGER AND ACQUISITION

China is the world?s biggest energy user and second-largest consumer of oil, after the US.

Chinese state-owned oil companies have emerged as a major force in global mergers and acquisitions in the past five years, as they carry out their mandate to improve China?s energy security by pinning down new supplies of oil.

Major Chinese oil deals this year include?Cnooc?s $1.3bn investment in shale oil projects?with Chesapeake Energy of Oklahoma, and more recently Cnooc?s?$2.1bn purchase of OptiCanada, an oil sands producer.

However, other prominent deals ? including PetroChina?s proposed?$5.4bn tie up?with Canadian energy company Encana ? have fallen through, underscoring the difficulties of M&A at a time of volatile crude prices.

Some industry executives also point out that recent leadership changes at China?s big oil companies may dampen M&A activity this year as people settle into their new roles. In a state-directed reshuffle this spring, Fu Chengyu, Cnooc chairman, was appointed chairman of Sinopec, while Su Shulin, Sinopec president, was promoted to a political role in Fujian province.

Beijing routinely moves around top leaders of state-owned enterprises as a means to indirectly maintain state control. Mr Su?s move to Fujian follows a history of other top Chinese leadership, including China?s security chief Zhou Yongkang, who have gone from the oil industry on to the highest levels of power.

Cnooc also took the unusual step of apologising for the oil spill that occurred this summer in the?Bohai Bay?on an offshore block it co-owns with?Conoco Phillips. The industry has been watching closely as Chinese regulators deal with the spill, which they say is the largest from an offshore rig in Chinese waters.

Last week the government said it was preparing to sue ConocoPhillips, the operator of the wells, over the spill, which released about 3,200 barrels of oil and fluids into the ocean. Spill-related closures also prompted Cnooc to lower its production forecast for 2011.

Sinopec’s shares closed 6.6% higher on Monday after it reported a net profit of 41.2bn yuan ($6.4bn; ?3.9bn) for the first six months of the year. That was a 12% surge from 36.8bn yuan net profit during the same period last year.

Sinpoec is Asia’s biggest oil refiner by volume.

The company said?robust domestic demand resulted in an increase in prices of refined oil products, which helped to boost its performance.

DOUBLE EDGED SWORD

One of the biggest contributors to Sinopec’s profits in the first half of the year was a surge in earnings from its exploration and oil production business.

Analysts said that while higher crude oil prices resulted in good profits in the exploration division, they also caused problems in other parts of the business.

“In the down stream sector, the refining business, they have to contend with higher input costs, so that is going to hurt their profits,” Calvin Lee of Platts told the BBC’s Asia Business Report.

That was evident in Sinopec reporting a 12.2bn yuan loss in its refining subsidiary, compared with a 5.7bn profit last year.

“Inflation is a big factor in China, which has been slowing down the number of times they have actually adjusted prices.” Platts’ Mr Lee said.

Sources: FT, BBC

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