Beijing/Lisbon: Chinese state-owned oil company Sinopec Group extended its interests in Brazil’s deepwater oil finds on Friday with a deal to pay $3.5 billion for a 30% stake in the Brazilian unit of Portuguese oil company Galp Energia.
Although the deal gives Galp more cash than the minimum €2 billion ($2.7 billion) it had sought to help finance its share of the oil field development costs, the price Sinopec is paying disappointed Galp investors, sending the Portuguese firm’s shares down over 10%.
Sinopec fuel storage tanks line the waterfront in Hong Kong. (Bloomberg photo)
Galp had been expected to raise €2 billion from selling a 20% stake.
The deal follows Sinopec’s $7 billion acquisition last year of a 40% stake in the Brazilian arm of Spanish oil company Repsol and a separate offshore oil development deal in April with Brazil’s state-controlled oil company Petrobras.
“For Sinopec, there are not many opportunities to grow in the traditional domestic upstream oil and gas sector -- overseas acquisition is an area to find growth,” said UOB Kay Hian analyst Yan Shi.
“It will benefit Sinopec on upstream reserves, and reduce risks in its money-losing downstream operation.”
But Galp’s share price was still down 9% at €13.5 by 03:30 pm, off an earlier low of €12.92.
“The implied values of Galp assets from that deal are disappointing. Repsol got $5.6-5.8 per barrel of reserves and this deal works out at $3.9 per barrel,” said Pedro Pintassilgo, fund manager at F&C in Lisbon.
“The initial slump of over 10% may be a bit of a shock reaction, so the stock could recover a bit, but it was a big disappointment,” he added.
Galp said the deal valued its total existing assets in Brazil at $12.5 billion.
“This capital increase significantly strengthens Galp Energia’s capital structure, fully securing its funding needs for the future expansion and development of its upstream activities,” Galp said in a statement.
Galp is a minority partner with Petrobras in key offshore discoveries including the vast Lula field, formerly known as Tupi, as well as the Cernambi and Iara finds.
Under the development plans Sinopec expects to get 21,300 barrels of oil equivalent per day (boedp) in 2015 with production expected to peak at 112,500 boedp in 2024.
Under the agreement, Sinopec’s wholly owned unit, Sinopec International Exploration and Production Corp (SIPC), will take new shares to be issued by Galp and assume shareholder loans, Sinopec Group said in a statement.
“Taking into consideration this investment and projected future capital expenditure, the total cash payout amounts to approximately $5.18 billion at closing,” Sinopec said.
The transaction must be approved by the Chinese government.
China’s outbound acquisition deals this year totalled $37.6 billion, down from $54.1 billion last year, according to Thomson Reuters data.
Sinopec’s overseas acquisition strategy is partly guided by the desire to build up scale in certain countries, including Brazil, said a company official who declined to be named.
Sinopec Group is the parent of Hong Kong-listed and Shanghai-listed China Petroleum & Chemical Corp (Sinopec). The group does overseas upstream oil and gas investment and operations via its wholly owned unit SIPC.
Sinopec was advised by Societe Generale, while Galp Energia was advised by Bank of America Corp, J.P. Morgan , UBS Caixia BI, a source familiar with the matter said.