Zacks_Analysts' Blog : Sinopec to Buy Galp Unit - Analyst Blog

China Petroleum and Chemical Corporation (SNP), aka Sinopec, announced plans to acquire a 30% stake in the Brazilian unit of Portuguese oil company Galp Energia SGPS SA. The purchase price has been settled at $3.54 billion. However, considering the future capital expenditure, Sinopec’s total cash payout is estimated at around $5.18 billion.

Per the agreement, Sinopec will acquire four deep-water blocks in Brazil's Santos Basin, and its affiliate – Sinopec International Exploration & Production Corporation – will buy shares issued by Galp.

This deal will provide Sinopec with 21,300 barrels of oil-equivalents per day in 2015 with production expected to reach 112,500 barrels of oil-equivalents per day in 2024.

This acquisition is in line with Sinopec’s strategy of widening its oil and gas operations in Latin America that hold immense potential with rich oil resources in offshore deepwater. Hence, Sinopec has been targeting to strengthen its foothold on Brazilin soil with foreign collaborations and tie-ups.

Last December, Sinopec formed an alliance worth $17.8 billion with Spain’s largest integrated oil and gas company, Repsol YPF, S.A.to jointly develop the exploration and production of Brazilian offshore assets.

Another major Sinopec investment in Latin America followed the agreement with Occidental Petroleum Corp. (OXY) to buy its interests in 23 production and exploration fields in Argentina for $2.45 billion.

We believe Sinopec is trying to build a better position in the energy space and expect 2012 to be a profitable year owing to the higher contribution from upstream activities. The company is also steadily expanding its presence in overseas markets, with major focus on properties in Latin America and Africa where most new prolific discoveries were reported in recent years.

However, Sinopec remains under pressure due to the slowdown of the Chinese industrial scenario in response to the global economic volatility. The other major areas of concern include operational disruptions, labor and material cost inflation affecting project outlays, governmental regulations and severe competition from domestic and international peers.

Hence, we see Sinopec performing at par with other industry players and maintain a Neutral rating on a long-term basis.