Pricey M&A, Cheaper Gas Undermine Sinopec 溢价收购和成品油降价中石化面对双重利空

By newsdoug on October 10, 2011

Sinopec (HKEx: 386; NYSE: SNP), one of China’s top 3 oil companies, is taking a double hit as China gets back to work this week, due to factors both within and beyond its control. First let’s look at the factor that’s well within its control, namely the announcement by Canada’s Daylight Energy (Toronto: DAY) that it will be acquired by a Sinopec unit for a tidy $2.1 billlion, or about double its market value. (English article) Obviously Sinopec sees something more in Daylight than most other investors do, but on a broader basis this kind of overpayment looks all too typical of China’s resources firms that look determined to acquire global assets at any cost under Beijing’s broader plan to make China more energy self-sufficient. The plan could ultimately work if energy prices remain high. But I suspect the bigger trend for the next 3-4 years will see stable and possibly even falling global prices as the world’s economy remains weak and alternate energy sources gain efficiency, meaning Sinopec is probably paying far too much for this company. On the more immediate front, Sinopec and fellow oil majors PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) and CNOOC (HKEx: 883; NYSE: CEO) are taking a hit from a 3-4 percent downward adjustment in gas prices announced by the state planner over the weekend. (English article) This will be the first downward adjustment this year, though it is far less than the 20 percent increase in domestic fuel prices the state planner has allowed since June 2010, the last time fuel prices were lowered. The irony is that even with this reduction China’s fuel prices are still generally higher than those in the US, and yet even at those levels the Chinese companies are all losing money on their refining operations. None of this looks good for Sinopec, which is the most dependent of the 3 big oil companies on refined product sales for its business. That fact, combined with the obvious overpayment for Daylight, are likely to weigh on both Sinopec’s business and its shares in the months ahead.

Bottom line: Sinopec’s overpayment for a major Canadian asset and China’s new lowered gas prices will weigh on the company’s business and stock for the next 6 months.

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