Sinopec Eyes Shale Boost, Debt Reduction with $17.5B Stake-Sale Cash


Asia’s largest oil refiner Sinopec Corp, which on Thursday posted a 12 percent fall in quarterly earnings, aims to use part of $17.5 billion in proceeds from a stake sale to boost shale gas production and lower debt. Sinopec unveiled a plan in September to sell the stake in its retail business, marking China’s biggest privatisation push since President Xi Jinping came to power almost two years ago.

Chen Yang, head of Sinopec’s investor relations, said in a conference call with analysts on Friday that the state-run oil company planned to use the proceeds partly to boost shale gas production, pay down debt and supplement working capital, according to people who joined the call.

Chen’s comments provide some clarity on how Sinopec plans to spend the cash. Chai Zhiming, deputy chief executive of Sinopec’s retail unit, told Reuters in September that it will use part of the proceeds to optimise its retail fuel business, boost non-fuel sales and pay down debt.

China, believed to hold the world’s largest technically recoverable shale resources, is hoping to replicate the shale boom that has transformed the energy landscape of the United States.

Output at Sinopec’s Fuling shale gas field in the southwestern province of Sichuan – China’s first major shale project – had hit 3.2 million cubic metres per day at end-June.

The Fuling field, with estimated reserves of 2.1 trillion cubic meters, will reach an annual capacity of 5 billion cubic metres by end-2015, and the capacity should double by the end of 2017, Sinopec chairman Fu has said.  

The first phase of the project entails total investment of $4 billion alone, Barclays bank has estimated.

Chen did not give details, but reiterated that Sinopec will complete the retail stake sale by the end of the year, said an analyst with an international investment bank who attended the briefing, which was off limits to the media.

Sinopec is widely expected to launch an initial public offering of the retail unit, but Chen provided no timetable for the potential listing.

Sinopec is also likely to use part of the $17.5 billion proceeds to buy upstream, refinery and petrochemical assets from its state parent, analysts say.

Some analysts said after the Friday conference call that the company still did not have a clear plan to utilise the cash.

“Sinopec is still considering use of cash proceeds with some being used in shale gas, although it will allocate capital in the best interests of shareholders,” JPMorgan said in a note.

Chen could not be immediately reached for comment. A Sinopec spokesman did not immediately respond to a request for comment. Sinopec said late on Thursday that it planned to buy a 37.5 percent stake in a refinery joint venture in Saudi Arabia from its parent for $562 million. It will finance the purchase in cash from the proceeds of a U.S. dollar bond issued in 2013.

Analysts say the 400,000-barrel-per-day Yanbu refinery, a joint venture with Saudi Aramco, is a good quality asset, and the transaction reflects Sinopec’s efforts to reduce competition with its state-owned parent.

But some analysts voiced concerns about the timing of the purchase, citing weakness in the global refining industry.


Due to lower international crude prices, weaker refining profits and slowing Chinese oil demand, Sinopec’s third-quarter net profit fell to 19.3 billion yuan ($3.16 billion) from 22.0 billion yuan a year earlier. The quarterly profit figure was above an average estimate of 15.7 billion yuan by three analysts surveyed by Thomson Reuters.

A 25 percent slide in crude prices since June due to slowing global demand, particularly in China, is putting a heavy burden on oil companies around the world.

Two other Chinese state-run oil giants, PetroChina and CNOOC Ltd, posted weaker third-quarter results this week, also hit by a slump in crude prices as a result of ample supplies and weakening demand.

Due to lower crude prices, the operating profit of Sinopec’s exploration and production segment fell to 13.4 billion yuan in the quarter from 15.8 billion yuan a year earlier, according to Reuters calculations based on its January-September results.  

Sinopec has also been hurt by an overcapacity in the domestic refining industry and flagging oil demand as a result of China’s economic slowdown, analysts say.

Its July-September refining profit sank to 1.3 billion yuan from 6.5 billion yuan a year ago due in part to inventory loss caused by the recent crude price falls, while profits of its oil products distribution and retail division dropped to 7.6 billion yuan from 10.1 billion yuan.

Sinopec processed 175.83 million tonnes of crude in the first nine months of this year, up less than 1 percent year on year. Its oil products sales volume totalled 138.15 million tonnes, up 2.61 percent.

Some analysts expect Sinopec to see a further recovery in its chemical business, which returned to profits in the third quarter following two quarters of losses.

Sinopec shares were up half a percent at HK$6.74 on Friday morning, but are still down nearly 15 percent over the past two months. (1 US dollar = 6.1140 Chinese yuan)



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