Sinopec International Exploration and Production Corporation, a unit of China Petroleum and Chemical Corporation or Sinopec (SNP), has wrapped up its 18% share acquisition in an Indonesian deep-water project from the U.S. oil giant Chevron Corp. (CVX). The total consideration of the transaction was $680 million.
Last December, Sinopec had signed the deal with Chevron. The move marked the leading Asian petroleum and petrochemical company’s re-entry into Indonesia following its withdrawal in 2006.
Per the deal, Sinopec assumes an 18% interest in the Gendalo-Gehem deepwater natural gas project off Indonesia’s East Kalimantan province. The project comprises three blocks in the Makassar Strait offshore East Kalimantan approximately under 6,000 feet water. The company expects its production to peak in 2016 at 370 thousand metric tons of equity oil and 79 billion cubic feet (Bcf) of equity gas. The recoverable reserves are estimated at 15 million barrels of crude oil and 700 Bcf of natural gas.
The deal is an indicator of Chinese energy companies’ endeavor to boost their merger and acquisition activities in order to lock energy supplies for their thriving economy. This is further evident by Sinopec’s recent agreement to acquire the Calgary, Alberta based oil and natural gas company, Daylight Energy Ltd. for about C$2.2 billion (US$2.1 billion).
China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players to meet the country’s fast-growing energy needs. Being one of the two integrated oil companies in China, Sinopec is well positioned to capitalize on these favorable trends.
We believe the company is trying to build a better position in the upstream space and expects 2011 to be a profitable year owing to the higher contribution from related activities. Sinopec holds a Zacks #2 Rank, which translates to a short-term Buy rating.
However, volatile oil and gas fundamentals as well as cost inflation compel us to maintain our long-term Neutral recommendation for the company.
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