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Sinopec to Buy E&P Assets Abroad

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Refining giant China Petroleum and Chemical Corporation (SNP - Free Report) , also known as Sinopec, plans to acquire some of its parent company’s – Sinopec Group – overseas upstream oil and gas assets. The assets would be acquired once the parent company is through with its restructuring exercise and their evaluation.

The purchase forms a part of the company’s strategy to obtain hydrocarbon reserves and expand its business to reduce the effect of oil price volatility. The chairman of Sinopec said that it will need financing from external sources to fund the transaction. No other particulars concerning the schedule or other details about the proposed purchase were revealed by the company.

Sinopec recently reported first half 2012 net income of 24.5 billion yuan (US$3.87 billion) and earnings per share of 0.272 yuan ($4.30 per American Depository Share [ADS]), both down approximately 40.5% and 41.1%, year over year, respectively.

The company’s performance was affected by the slump in prices of domestic fuel products in the second quarter and a sluggish economy, which resulted in weak demand for chemical products. Moreover, Sinopec’s downstream refining segment operations were also hit by government restrictions on passing the price hike to consumers.

Owing to rising raw material prices and domestic price ceiling on refined products, Sinopec is keen on buying assets abroad. Sinopec obtains majority of its revenue from downstream activities unlike its peers PetroChina Co. Ltd. (PTR - Free Report) and CNOOC Ltd (CEO - Free Report) , whose activities are concentrated in their upstream operations.

Recently, the Wall Street Journal reported that Sinopec Group is looking to purchase an equity stake in the $2.5 billion Texas clean energy project. Total investment, along with contributions from Chinese banks, is estimated at a maximum of $1 billion.

Should the transaction go through, it will be one of the biggest by a Chinese company in the U.S. power sector. The deal is expected to be announced in September this year with full financial details and the size of the stake.

Sinopec Group hopes to gain experience in carbon dioxide flooding through this project, which will enhance its output while extracting oil. Therefore, the company’s quest to purchase assets abroad will enhance its oil and gas yield and help to mitigate the increasing loss from gasoline and diesel sales at state-controlled prices.

Sinopec holds a Zacks #4 Rank (short-term Sell rating). Longer term, we are maintaining our Underperform recommendation on the stock.

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