February 5, 2013 3:59 pm

Sinopec: from east to west

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Chinese oil major continues mission to resemble a western oil major

Enjoy your breakfast. Shareholders on opposite sides of the planet had to digest the fact that their holdings would be worth less on Tuesday than when they went to bed on Monday. Little wonder, the announced share issues by KPN and Sinopec wiped 16 per cent and 6 per cent off their shares respectively. At least investors in the Dutch telecoms group were offered a rights issue. Those in the Chinese oil major had to lump its $3bn share placement at a 10 per cent discount to the undisturbed share price. It will dilute their Hong Kong shares by 17 per cent, the total shares outstanding by 3 per cent, and Sinopec’s state-owned parent will not take up any of those shares.

But then Sinopec is on a mission to resemble more a western oil major than a limping Chinese state owned enterprise. Ever since Fu Chengyu moved over from Cnooc to become chairman of Sinopec in 2011 he has been determined to reduce its dependence on refining further. After all, Chinese fuel price controls have traditionally been a drag on profits. That means Sinopec needs funding to buy oil production assets to boost its upstream operations. It bought deep water oilfields in Angola from its state-owned parent in 2010 and has talked of a further asset injection since last year.

The timing for a share placement is canny. Shares in Sinopec have rallied by a third in six months compared with just 16 per cent and 4 per cent at peers PetroChina and Cnooc. Better margins, helped by fuel price rises in the third quarter and Sinopec’s focus on refining more complex products, have helped. As have expectations of imminent fuel price reform. Bernstein estimates that, along with the cash generated in the second half of last year, the sale of shares could free $8bn in cash for Sinopec to make a big buy, such as its parent’s Nigerian assets. Still, Sinopec must ensure those purchases at least add value to justify Monday’s surprise call.

This article has been amended since original publication to reflect the fact that dilution of shares in Hong Kong varies from the dilution of total shares outstanding.

Email the Lex team in confidence at lex@ft.com

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