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No more Mr Moneybags

11 November 2011 By John Foley

Chinese oil major Sinopec is starting to show some M&A discipline. It has just invested $5.2 billion in the Brazilian oil fields of Galp Energia, the Portuguese oil company. Compared to its last big deal it did in the same back yard, the price looks positively reasonable. With luck, Sinopec might make a habit of powering its big acquisitions with logic as well as cash.

Sinopec and Galp look well matched: the buyer has near-limitless access to cheap bank lending. It has the unquantified, but very substantial, backing of the state too.

Galp, in contrast, looks strapped for cash. Capital expenditure for the year comfortably outweighs its projected EBITDA for this year, according to Reuters consensus estimates. Balance sheet strains may explain why Sinopec is helping to refinance a chunk of Galp’s debt with a $390 million loan.

Galp investors hoped for more, and its shares fell 11 percent as the deal broke. Based on the $12.5 billion at which Galp’s Brazilian assets are valued, Sinopec is paying $4.34 per barrel of oil equivalent for the project’s total risk-adjusted reserves. Last year, Sinopec paid around a fifth more per barrel for a 40 percent stake in a neighbouring project of Spanish energy giant Repsol. The difference in price neatly explains the $1.7 billion fall in Galp’s value as news of the deal broke on Nov. 11.

In reality, some differences in the qualities of the two Brazilian assets explain the differences in price. Galp’s fields are gassier than Repsol’s, which puts a dampener on the valuation. Moreover, the Galp stake is smaller, and comes with less operational influence. And Sinopec isn’t saying how much oil it can carry home from the venture – a perk that carries high value for state-owned producers from the world’s most energy-hungry nation.

Still, Sinopec, now on its third sizeable overseas deal since the beginning of October, does seem to be learning some tricks of the M&A trade. And it seems to appreciate that the key is not to overpay. The captive savings of 1.3 billion citizens are done no good being channeled into whimsically priced acquisitions.


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