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Asia's leading refiner China Petroleum and Chemical Corp, known as Sinopec (SNP), is eyeing the French oil and gas explorer Etablissements Maurel & Prom (MAU) for a $2+ billion acquisition cost. MAU has an enterprise value of $2.27 billion including its $1.75 billion market cap and through June 2012, its ROE was 11.17%. But more than the numbers, the company has drilled more than 100 wells with an impressive success rate of 46% and has significant operations in the central African state Gabon from where it produces 20,000 BoE per day.

Besides Sinopec, it is also believed that Shell (RDS.A), Anadarko Petroleum (APC) and Indian Oil Corp have also been at the negotiation table. A year ago, Sinopec started sniffing around looking for a partnership but now, unlike last year, the negotiations are believed to be about the acquisition of the entire company. Moreover, MAU's management has also clearly stated that it is too small to independently operate and would prefer partnering with a larger firm.

On the other hand, the Chinese government's policy to curb inflation by controlling oil prices has taken all the attractiveness away from China's oil refining business. In the first half of the current year, the Chinese offshore giant CNOOC (CEO), which is not exposed to refining, earned 11 times less in revenues than Sinopec but still made $1.18 billion more in profits. Downstream refining is a tough business in a freer market, no less so in a controlled one.

Sinopec has been looking elsewhere for expansion to compensate for the losses in China. Furthermore, CNOOC's $15 billion Nexen bid has also shown that an entry into North America has a peculiar set of political hurdles and therefore African expansion looks to be much easier to pull off. The company has outlined a strategy to increase its overseas oil production by 118% in the next three years to 50 million tons. In the first three quarters, Sinopec increased its overseas oil production by 27% year-on-year to 16 million barrels, which forms 6.5% of its total output. It already has operations in Gabon after it acquired Addax Petroleum for $8.8 billion about three years ago, while it is further expanding in Africa. The business is reportedly negotiating a purchase of Total's (TOT) Nigerian oil assets for $2.4 billion. It is currently working on the 49% acquisition of Talisman Energy (TLM) which is expected to be complete by the end of 2012 while it is building a storage facility in Indonesia's Batam free trade zone. Meanwhile, it is also learned that Sinopec, in collaboration with DKRW Advanced Fuels, is planning to start construction on a $2 billion coal to gasoline production plant in the small town of Medicine Bow, Wyoming.

In its last earnings report, Sinopec was able to deliver better results after the Chinese government came in support of its refiners by increasing oil distillate retail prices twice in August and September following a more than 50% drop in inflation to 1.9% in September. The company's profit fell by 9.4% year-on-year to $2.93 billion as opposed to the $2.27 billion anticipated. Its refining division, which has so far been piling up losses -- $3 billion for the first half of current year -- is expected to turn itself around in the fourth quarter, due to the loosening of fuel prices. However, the company did not disclose its refining loss for the third quarter.

So far, the Chinese oil and gas firms have spent more than $100 billion in overseas expansion in the last ten years and due to political hurdles in the United States and Canada their expansion into Africa, the UK North Sea and Middle East look more lucrative. It should also be noted that Sinopec has ambitious overseas expansion plans and in the first nine months, its 27% growth of overseas operations is far more than its nearest rival, CNOOC, whose overseas output in the same period grew by 18%. On the other hand, PetroChina (PTR), the largest Chinese oil company and the other major refiner besides Sinopec, produces more than 9.4% of its oil from outside of China.

But, unlike Sinopec, Petro's profits have taken a beating in the third quarter owing to massive refining losses that saw quarterly income sliding by 33% year-on-year to $4 billion. The market leader has now become the worst performer. However, the operational losses from refining have decreased by 27.7% to $4.8 billion.

Metric

Sinopec

PetroChina

CNOOC

YTD Stock

up 1.41%

up 10.13%

up 21.71%

Market Cap

92.51B

243.51B

94.77B

Beta

0.46

0.86

1.36

P/E

10.86

13.28

9.52

EPS

9.8

10.3

22.3

Yield

2.60%

3.10%

1.70%

ROA

5.10%

5.57%

13.33%

ROE

11.00%

11.89%

23.71%

Like Sinopec, PetroChina is also looking at brighter times ahead due to the more flexible pricing regime for fuels as the government is expected to announce a more flexible fuel policy soon which is expected to support the refining sector.Gas reforms are also going to be introduced that will allow Petro to completely turn around its loss making gas and pipeline unit. The government is expected to bring in the new policy by March next year, which will allow Petro to sell the gas it imports at a reasonable profit. The gas is currently imported from Central Asian pipeline and various other LNG terminals but the current price controls have caused a 93% dip in this year's nine months' profits to $141 million, as compared to last year's $2.11 billion in the same period. Further details of the losses from natural gas were not disclosed. So far, the offshore firm CNOOC's performance has been far better than Sinopec or Petro. Its stock has soared while it has given much higher EPS and ROE.

Source: Sinopec Aiming For Rapid Expansion Abroad