China’s state owned oil giant China Petroleum & Chemical Corp (ADR) (NYSE:SNP), otherwise known as Sinopec Corp is planning to sell new shares worth $3.1 billion in what is going to be one of the continent’s largest equity sales in 2013. Sinopec has officially said that it needs funds for “general corporate purposes” but it is the reality is that it is going on a wholesale buying spree; purchasing assets around the world, including some from its parent China Petroleum & Chemical Corp (ADR) (NYSE:SNP).
Sinopec will be selling 2.85 billion new H-shares in Hong Kong –– unlike the A-shares at Shanghai that are not open to foreign investors –– that equals approximately 17% of its total H-shares outstanding and 3.2% of the total equity capital of the company. Goldman Sachs Group, Inc. (NYSE:GS) is going to be the sole book runner and will get the entire underwriting and brokerage fee estimated to be $40 million. Following the announcement, the company shares fell by 7.2% in New York and by 8.2% in Hong Kong from 29th January until that markets closed for the week ending 8th February.
On the other hand, Goldman’s shareholders are excited and rightly so. Markets would normally assume at least four to five bookrunners for a deal of this size and scale. Nearly everyone had a piece of the huge Facebook IPO last May, with Morgan-Stanley taking the lead.
The Price of Cheap Diesel
Meanwhile Sinopec, China’s leading refiner, has borne the brunt of China’s fuel price ceiling which has forced them for more than a year to sell their downstream products at a loss. Refining has been a low margin business for a long time, it only gets worse when the state intervenes for its own purposes. All around Asia-Pacific and India fuel prices are fixed in some way to both keep a lid on social unrest and over-stimulate economic growth while understating the CPI.
Out of the three biggest firms operating in the Chinese oil and gas sector, including CNOOC Limited (ADR) (NYSE:CEO) and PetroChina Company Limited (ADR) (NYSE:PTR), Sinopec has the largest exposure to the domestic downstream market which became a nightmare for refiners in 2011-12. In the first nine months of its current fiscal year, Sinopec amassed $2.5 billion of refining operational losses but ended up with a $6.87 billion profit due to oil and gas production.
However, China did increase its oil prices last year; a further hike of 4% is also expected in February. Under the government’s current mechanism National Development and Reform Commission (NDRC) can increase or decrease fuel prices if international oil prices change by at least 4% over a period of 22 days. In 2012, fuel prices were increased four times and reduced four times but the price hike has been greater than the reduction that followed, reflective of the rising cost of a barrel of Brent Crude.
While China and Vietnam have been keeping a lid on oil prices to rein in inflation, India has been cutting fuel subsidies to control the mounting fiscal deficit fearing another downgrade from the rating agencies and further devaluation of the Rupee which will only tighten the noose around India’s neck and its heavy dependence (80%) on imported oil. This has created the very civil unrest China has been looking to avoid. The steady appreciation of the Yuan, however, has helped offset some of oil’s volatility.