Sinopec Continues China's Latin American Energy Moves With $2.45B Argentina Deal

Includes: CEO, OXY, SNP
by: Money Morning
China's state-run oil and gas giant China Petroleum & Chemical Corp. (Sinopec) (NYSE: SNP) on Friday announced it would buy Occidental Petroleum Corp.'s (NYSE: OXY) Argentine operations for $2.45 billion, a key sector move highlighting the growing trend of China's increased presence in Latin America's valuable energy properties.

The properties produce about 44,000 barrels of oil equivalent a day. Sinopec said in a statement the purchase would "prove significant in cementing economic ties and boosting trade between China and Argentina."

China's continued venture into the Latin American energy industry has led the country to spend more than $15 billion in deals there this year, with more likely to come.

"There is not a single CEO of a major oil company in Latin America, not one, who has not been approached by the Chinese," a M&A banker at a western bank told the Financial Times.

To meet China's booming energy demand the country has ventured into new M&A territory, snatching up global assets before North American companies do. The eager Chinese oil industry is becoming more aggressive with its energy plays, changing the way deals are done - and the countries it targets.

"Five or 10 years ago the Chinese [oil] companies were buying assets by negotiating directly with a limited number of countries, and there's a certain shifting perception now," Gavin Thompson, head of Northeast Asia for energy and metals researcher Wood Mackenzie , told the FT.

One of the reasons western companies are willing to sell their Latin American assets is the region's difficult tax and regulatory environment. Energy tax policies in Argentina are a deterrent when companies go hunting for acquisitions.

But China's oil companies are stronger financially, with more government support and access to cheap credit.

"China is probably the only country that would actually buy in [to Argentina], because of the political pricing system there," according to Laban Yu, and oil and gas analyst at Macquarie Group.

Experts think the strict energy policies won't be around forever, either, which means investments made now could be more valuable in the future.

"Argentina has a tough fiscal regime," a CNOOC executive told the FT. "But that even happens in Australia. We see some encouraging signs that it is going in the right direction."

Sinopec's deal is the latest in a string of billion-dollar Chinese investments in the region.

CNOOC Ltd. (NYSE:CEO) paid $3.1 billion in March for a 50% stake in Argentina's private energy company Bridas Energy Holdings Ltd. Then last month CNOOC and Bridas agreed to pay $7.06 billion for a 60% stake in Argentina's Pan American Energy LLC. In May, China's biggest chemicals trader Sinochem Group paid $3 billion to Statoil ASA (NYSE ADR: STO) for 40% of Brazilian offshore oil field Peregrino.

And Sinopec already made a $7.1 billion investment in Repsol YPF S.A.'s (NYSE ADR: REP) Brazilian subsidiary in October.

China's Argentine investments surged tenfold in five years, from $12.9 million in 2004 to $136.7 million in 2009, according to Julian Pena, a lawyer who sits on the board of the Argentine - Chinese Chamber of Commerce. The bulk of money has gone toward energy deals, but the Asian powerhouse is also eyeing Argentina's rich mineral resources.

Money Morning Chief Investment Strategist Keith Fitz-Gerald in January 2010 wrote about China's plans to move into the region to satisfy the fastest growing economy's energy needs.

"Mark my words: We will see additional Chinese oil firms headed for South America, and can expect some headline-making deals," said Fitz-Gerald. "China has very specific long-term energy objectives that are going to result in the complete realignment of the global energy industry. Acquisitions like this will continue as long as there is growth in China."

U.S. Companies Shore Up Domestic Investment

While China looks for overseas potential, Occidental, in addition to the Sinopec deal, announced last week it is buying oil and gas properties in South Texas and North Dakota for $3.2 billion.

"These transactions will be immediately accretive to our earnings, return on capital employed and cash flow after capital," said Ray Irani, Occidental's chief executive officer. "With these new acquisitions and without Argentina in our asset mix, achieving both our short-term and long-term average annual production growth outlook of 5%-8% will be more certain and will generate higher returns."

Occidental is paying $1.8 billion to Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) for South Texas gas properties, which produce about 200 million cubic feet per day of gas equivalent. In another deal, the company is buying 180,000 shale rock acreage in North Dakota from a private seller for $1.4 billion.

The company is also boosting its investment in oil services company Plains All American Pipeline L.P. (NYSE:PAA) by 13% to 35% ownership, and will buy out Sempra Generation's (NYSE:SRE) 50% stake in the Elk Hills Power plant to obtain full ownership.

Analysts said the moves would be instrumental in achieving Occidental's growth plan. "

Occidental continues to high-grade its portfolio, investing capital in North American oil opportunities," said analysts from Howard Weil Inc.

The deals increased Occidental's confidence in meeting its annual production growth target of 5% to 8%. The company also plans to raise its quarterly dividend by 21% to 46 cents per quarter from 38 cents.

Los Angeles-based Occidental has been shifting its business focus to U.S. development, using new techniques to extract more oil from mature properties instead of investing in little-explored overseas fields.

The deal is the latest in this year's trend of increasing domestic U.S. natural gas investment.

Chevron Corp. (NYSE: CVX) last month announced plans to pay $4.3 billion for Atlas Energy Inc. (Nasdaq: ATLS) for a bigger slice of the U.S. shale gas industry. In June Exxon closed its $41 billion all-stock deal for XTO Energy.