Sinopec Eyes Move for Chesapeake Assets
OREANDA-NEWS. June 26, 2012. Sinopec, the Chinese oil and gas group, is considering bidding for billions of dollars worth of assets owned by Chesapeake Energy, the US gas producer.
Fu Chengyu, head of Sinopec, was in Oklahoma in the US this week in connection with the company’s due diligence on the Chesapeake assets, according to people familiar with the move.
By buying assets rather than making a bid for the company itself Sinopec hopes to minimise the sort of political backlash that forced Cnooc to drop its USD18.5bn bid for Unocal in 2005, bankers and oil executives say.
Chesapeake Energy has been hit hard by low natural gas prices in the US and is in the midst of an asset disposal programme to help reduce its debt. Its shares have fallen 25 per cent from their March peak.
The prize asset in Chesapeake’s disposal programme for this year is its leases on 1.5m acres (600,000 hectares) of land in the Permian Basin region of west Texas and New Mexico, one of the most coveted areas of the US for oil development.
Analysts suggested last month that the land could fetch \\$6bn or more, although the fall in the price of oil and the possibility of further falls to come are expected to have curbed buyers’ willingness and ability to pay higher prices. The company hopes to agree a deal by the end of September at the latest, possibly sooner.
Aubrey McClendon, Chesapeake’s chief executive, said at the company’s annual meeting earlier this month that 20 companies had already been through the data room for the Permian Basin assets and a further 10 had been lined up.
If the company manages to sell the leases for about \\$5bn as expected, following the USD 4bn sale of pipeline assets announced earlier this month, it will fill most of the expected gap between the company’s capital spending plans and its weakened cash flows, which are being hit by low prices for natural gas and natural gas liquids such as ethane used as chemical feedstocks.
Sinopec is carrying out its own restructuring designed to bring more cash into the company and delever its balance sheet as it moves to adopt a more active global mergers and acquisitions strategy.
It has been slower into the US industry than its Chinese rival Cnooc, where Mr Fu was chief executive until 2010. In January, however, Sinopec unveiled a USD 2.5bn deal with Devon Energy, also based in Oklahoma City, to invest in five shale oil and gasfields from Ohio to Alabama.
The Chinese group has 2,000 people looking into opportunities globally and is starting to focus on developed markets for ambitious deals. It has been increasing its overseas mergers and acquisitions since Mr Fu started leading the group in April 2011, and those close to the company say that the pace of acquisitions is set to pick up.
However, Sinopec’s recent losses in the refining sector have left the company highly geared at about 40 per cent, a problem if Mr Fu is to fund his M&A ambitions.
Sinopec plans to hive off some non-core assets, a process that will include consolidating Sinopec’s oil services and engineering subsidiaries into a new unit that will then be taken public. It has not set a date for the public listing but analysts expect it could come late next year or early 2014.
The group is primarily focused on downstream sectors such as oil refining, petrochemicals and distribution, which have been making losses because of a slowing global economy and China’s state-set petrol prices.
Mr Fu’s vision is to shift Sinopec’s focus to upstream oil and gas production, where margins are higher. “The Achilles heel of Sinopec is the lack of oil and gas reserve growth upstream while being too dependent on downstream refining,” says analyst Gordon Kwan of Mirae Asset Securities. “Among the three national oil companies, Sinopec’s balance sheet is the weakest,” he adds.
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