Saturday 29 November 2008
China’s Oil/Gas Big Three Seeking Overseas Fire Sales
Accepting cheap oil and gas prices as a gift of the commodities slump, China’s oil and gas giants are moving decisively. PetroChina has signed a contract with Shell for 40 million tons of liquefied natural gas (LNG), and Total, in negotiations with China National Offshore Oil Corporation (CNOOC), declared on Wednesday that the two parties would soon finalize their own LNG contract. In Beijing, the China-Russia $25 billion “loan for oil” negotiation, which resumed recently, is moving ahead.
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China’s Oil/Gas Big Three Seeking Overseas Fire Sales
CSC staff, Shanghai
28 November 2008
Accepting cheap oil and gas prices as a gift of the commodities slump, China’s oil and gas giants are moving decisively. PetroChina has signed a contract with Shell for 40 million tons of liquefied natural gas (LNG), and Total, in negotiations with China National Offshore Oil Corporation (CNOOC), declared on Wednesday that the two parties would soon finalize their own LNG contract. In Beijing, the China-Russia $25 billion “loan for oil” negotiation, which resumed recently, is moving ahead.
Meanwhile, corporate bond issues from PetroChina and Sinopec, totaling 50 billion yuan, have been approved by the China Securities Regulatory Commission (CSRC). China Oilfield Services, Limited (COSL), a subsidiary of CNOOC, is also to issue 6 billion yuan of corporate bonds. The three oil companies are seeking overseas fire sales.
Hoarding “Grain” and Seeking Overseas Expansion
China National Petroleum Corporation (CNPC), PetroChina’s parent company, declared on October 24 that it had successfully registered the issuance of 80 billion yuan of mid-term notes, making it the first mid-term note issuance after the People’s Bank of China restored the registration of that security. The 80 billion yuan ties a record high, equal to an issuance registered by the Ministry of Railways.
Just three months ago, PetroChina’s plan to issue 60 billion yuan corporate bond was approved at the shareholder meeting. The fund to be raised is also the highest among all corporate bonds issued by Chinese companies.
Compared with other state-owned enterprises issuing bonds, PetroChina is not facing heavy cash flow pressure. According to its third quarter financial report, the company’s net cash flow was 149.863 billion yuan, 11% down over the same period last year, and the company’s short term borrowing at the end of term totaled 28.466 billion yuan, an increase of 51.9% year on year. PetroChina’s present asset liability ratio is less than 40%.
“On one hand, due to international oil price fluctuations and a huge amount of special petroleum proceeds paid to the government, the company’s profit fell over the last year, and it really needs supplementary funds. On the other hand, given the opportunities brought on by the world financial situation, the company needs reserve cash for its future development,” said a senior official in PetroChina to China Business News reporter.
The two other Chinese oil and gas giants are following PetroChina, and seeking to raise money through bond issues. Sinopec’s plan to issue 20 billion yuan corporate bonds was approved by the CSRC. The COSL board approved the plan to issue no more than 6 billion yuan of corporate bonds on Wednesday.
The corporate bonds issues are intended to finance the domestic oil and gas companies seeking fire sales overseas. “Given proper opportunity, the company may acquire some overseas assets according to its needs,” said the PetroChina senior official.
In the CNPC mid-term note prospectus, it is stated that 30% of the funds raised will be used to increase its share holding in PetroChina, and the other 70% will be used as supplementary operations funds for the company’s strategic projects such as construction of key overseas projects and risk exploration.
He Zheng, head of strategic research for Sinopec’s Economic and Technical Research Institute, says M&A opportunities always exist, and since overseas oil and gas assets are depreciating sharply, it is a good choice for Chinese enterprises to get in on some overseas M&A.
Bidding Globally
The three firms are now bidding globally and making progress. In July this year, CNOOC acquired Norway-based Awilco Offshore ASA (AWO) for $2.5 billion cash, and became the world’s eighth largest drilling service provider. According to analysts, COSL’s issuance of 6 billion corporate bonds has something to do with its parent’s tight fund supply resulting from this acquisition.
The three companies have been shopping intensively since the beginning of this week, with PetroChina and CNOOC both signing big LNG purchasing contracts with overseas suppliers. According to the framework agreement, Total will supply CNOOC with 1 million tons of LNG every year from 2010.
The China-Russia $25 billion “loan for oil” negotiation is said to be going smoothly. A CNPC source close to the negotiation told a China Business News reporter yesterday that the two sides have made significant progress, and it was hoped they would sign a contract soon. According to the agreement, Russia will contract to export 300 million tons of crude oil to China over the next 20 years.
Other moves are afoot. According to a foreign media report, CNOOC has been bidding $300 million to $700 million for natural gas assets in the Caribbean area, and CNPC is expected to take a 25% stake in the Pars LNG project in Iran. The former big shareholder Total’s stake will drop from 40% to 25%.
Some of this overseas action is pitting Chinese companies against each other. Two months ago, Marathon Oil announced the sale of its stake in No. 321 deep sea area off Angola. PetroChina bid individually while Sinopec and CNOOC bid jointly. It has been reported that the Sinopec/CNOOC combination won the bid for $1.8 billion, but a spokesman only admitted the companies had taken part in the bid and refused to reveal whether they had succeeded.
While the global financial crisis has brought Chinese oil and gas companies precious assets at fire sale prices, risks still exist. He Manqing, a Ministry of Commerce researcher, says that although overseas energy and resource prices have dropped quite sharply and bubbles in them have been basically pushed out, the global economic situation may worsen further and these assets may continue to depreciate. “Low prices are not the only factor companies need to consider when deciding about acquisitions. They must also think from the perspective of their development strategy.”
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