Tuesday, April 13, 2010

Did Sinopec Overpay by 20% for Syncrude Stake?

Yesterday, Sinopec agreed to pay $3.65B for ConocoPhillip's (COP) 9% stake in Syncrude Canada. Macquarie Securities had pegged the value at only $3B. While the deal may be more then some estimates, it doesn't mean that they overpaid for the asset. Commodities and especially oil don't have static prices so the value really depends on where oil goes over the next few years. If oil creeps back over $100, then China/Sinopec likely made a wise deal.

If anything the deal signals the demand China expects in the next decade. Paying 20% now may seem very cheap if we revisit the old highs which is likely very dependent on China demand. Who better to know those needs then China itself. The market might want to listen to what their saying with this purchase.

  • The company known as Sinopec Group agreed to pay at least $650 million more for ConocoPhillips’s 9 percent stake in Syncrude Canada Ltd. compared with an estimate by Macquarie Securities. The premium could have been narrowed by a stronger yuan, currently constrained by a peg to the dollar.
  • “Sinopec seems to be paying a higher premium,” said Gordon Kwan, head of regional energy research at Mirae Asset Securities in Hong Kong. “With talk of the yuan appreciating, this will increase China’s purchasing power in M&A deals.”
  • The country’s drive to own overseas energy assets is also spurred by price volatility in the oil futures market. Crude in New York rose to a record $147.27 a barrel on July 11, 2008, before plummeting to a four-year low of $32.40 on Dec. 19 that year as the worst recession since the Great Depression eroded fuel demand. Prices have since more than doubled to about $84.
  • “China’s fear is that it will be held captive by the futures market,” said Lee Boon Keng, the Singapore-based deputy chief investment officer at Bank Julius Baer & Co. “As oil rises to $100 a barrel again they need to secure more supply. China needs oil and other resources to feed growth of about 8 percent a year, but will there be enough to feed this kind of growth over the next five years?”
  • China, the world’s largest energy consumer behind the U.S., relied on imports to meet more than half of its oil needs last year. Chinese oil consumption reached 8 million barrels a day in 2008, according to the BP Statistical Review of World Energy.

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