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Sinopec to Acquire $3.1 Billion Stake in Apache Egypt Assets (4)

August 30, 2013

Sinopec Agrees to Buy $3.1 Billion Stake in Apache Egypt Assets

A China Petroleum & Chemical Corp. (Sinopec) storage tank stands behind a barbed-wire fence in the Tsing Yi area of Hong Kong. Photographer: Jerome Favre/Bloomberg

China Petrochemical Corp., Asia’s largest refiner, agreed to pay $3.1 billion for a 33 percent stake in Apache Corp. (APA:US)’s Egyptian oil and gas business, marking the state-owned company’s biggest purchase in the Middle East.

Buying the stake in the operations located in the Western Desert, away from the centers of political unrest in Egypt, will increase the company’s annual production by about 9 percent, according to Bloomberg calculations. The deal, which coincides with a potential move by PetroChina Co. (857) into Iraq, signals China’s increasing investment in the region as it secures energy investments.

“There definitely does seem to be a resurgence in overseas M&A” by Chinese companies, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said by phone. “The potential of PetroChina going back into Iraq and this deal in Egypt shows a willingness to take on more risk in this part of the world.”

The Chinese company is aware of the political uncertainties in Egypt and is focused on long-term development in the region, said Wei Fujun, a spokesman at the Sinopec International Petroleum Exploration & Production Corp., the unit making the purchase. The price of $3.1 billion is “very reasonable,” Wei said by phone.

Apache and Sinopec Group, as the Beijing-based company is known, will also form a global partnership to develop oil and gas projects, Houston-based Apache said in a statement late yesterday. Apache will be the operator.

Apache Shares

Apache jumped as much as 8.4 percent, the steepest intraday gain since March 2009. The stock was up 7.6 percent at $84.60 at 9:35 a.m. in New York.

Apache’s Egypt operations contained 641 million barrels of oil and 3.79 trillion cubic feet of gas in probable reserves at the end of 2012, Sinopec Group estimated in the statement.

The Chinese company paid about $33 a barrel for the assets, compared with $32.5 a barrel that Apache paid in November 2010 when it acquired BP Plc (BP/)’s Egyptian fields, according to estimates from Wu Fei, a Hong Kong-based analyst at Bocom International.

Brent, the benchmark for more than half of the world’s crude trade, was $80 a barrel on average in 2010, compared with $108 a barrel this year. “This deal does not appear to be more expensive than the acquisition history in Egypt,” Wu said.

It is more expensive than the $19.9 a barrel Cnooc Ltd. paid to Canada’s Nexen Inc., Wu said. Cnooc, China’s biggest offshore energy producer, bought Nexen for $15.1 billion earlier this year in China’s biggest overseas energy acquisition.

‘Extremely Aggressive’

Apache will use the proceeds to reduce debt, buy back shares and fund capital spending. The transaction is part of the company’s plan to sell $4 billion in assets by year end. China Petroleum (386) and Chemical Corp., Sinopec Group’s publicly traded unit, dropped 1.8 percent to HK$5.59 in Hong Kong.

“Apache has been extremely aggressive in monetizing assets and transforming their portfolio,” Leo Mariani, an analyst at RBC Capital Markets in Austin, Texas, said in a phone interview. “I don’t think there was much of an expectation that they could monetize their Egypt holding. Investors thought that the asset was impaired because of the civil war.”

The operations will add daily output of about 130,000 barrels of oil equivalent to Sinopec Group’s production, the company said in a statement. That compares with last year’s daily production of 1.5 million barrels of oil equivalent, according to Bloomberg calculations.

The deal, expected to close during the fourth quarter, is Sinopec Group’s biggest since the 2010 purchase of Syncrude Canada Ltd., according to data compiled by Bloomberg.

‘Feeding Demand’

The Sinopec Group “has a philosophy of acquiring assets overseas to feed China’s energy demand and a minority stake carries less risk,” James Hubbard, a Hong Kong-based analyst at Macquarie Group Ltd. said by phone. “It’s good for Apache to develop closer ties with a company like Sinopec Group.”

Chinese companies have completed 83 overseas oil and gas purchases worth $100.7 billion in the past five years, according to data compiled by Bloomberg. Cnooc Ltd. (883)’s $15.1 billion acquisition of Canada-based Nexen Inc. early this year was China’s largest overseas acquisition.

The Chinese government encourages energy companies to acquire overseas resources to meet the country’s growing energy demand and often asks state-run banks to fund such acquisitions with cheap loans. China’s crude oil imports may climb 7.3 percent and account for 58 percent of the country’s total consumption, China National Petroleum Corp. estimated in a January research report.

Overseas Acquisitions

PetroChina Co., China’s biggest oil and gas producer, plans to invest $60 billion on overseas acquisitions in the decade to 2020, raising its production abroad to more than 50 percent of its total, its former chairman Jiang Jiemin said in 2011.

PetroChina is in talks with Exxon Mobil Corp. to jointly develop its West Qurna-1 oilfield in southern Iraq, President Wang Dongjin said in Hong Kong on August 22. A deal may be concluded this year, he said.

CNPC, PetroChina’s state-owned parent, produces about 1.65 million barrels of oil a day from projects in Iraq, the company said last October.

A military coup toppled former Egyptian President Mohamed Mursi in July, sparking protests that have killed at least 1,000 people. Mursi became the first democratically elected president a year ago after Hosni Mubarak’s 29-year reign ended in 2011 following calls for his ouster as the Arab Spring, the term used to describe protests against autocratic rulers in the Middle East, swept across the region.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; James Paton in Sydney at jpaton4@bloomberg.net; Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net; Susan Warren at susanwarren@bloomberg.net


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