Sinopec Group Pays ‘Very High’ Premium for Brazil Oil Reserves

Oct. 4 (Bloomberg) -- China Petrochemical Corp. is paying a premium to take a stake in Repsol YPF SA’s Brazilian unit, betting that Latin American offshore oil reserves will help meet demand in the world’s biggest energy user.

Sinopec Group, as China’s second-largest energy company is known, agreed Oct. 1 to pay $7.1 billion for a 40 percent stake in Madrid-based Repsol’s unit, which has reserves in the same area as the biggest oil discovery in the Americas this century. That amounts to $15 a barrel, or 76 percent above the $8.50 Petroleo Brasileiro SA paid last month for assets in Brazil, said Neil Beveridge, an analyst at Sanford C. Bernstein & Co.

“This shows the importance that China places on securing oil resources overseas,” Beveridge said by telephone from Hong Kong. “This is a key emerging deepwater basin, and there are a lot of developments taking place. Sinopec has a good position established, but the price it has paid is very high.”

Chinese companies spent a record $32 billion last year buying energy and resources assets abroad. Sinopec Group’s investment is the country’s second-largest overseas acquisition and follows the company’s purchase of Addax Petroleum Corp. for C$8.3 billion ($8 billion) last year to gain reserves in Iraq’s Kurdistan and West Africa. Cnooc Ltd. and state-controlled Sinochem Group have paid about $3.1 billion each for stakes in oil producers in Argentina and Brazil.

“South America seems to be a key area of focus at the moment,” said Beveridge. “The focus has switched from Africa, and it’s all part of China’s desire for energy security and the exceptional growth in demand for oil.”

Shares Rise

American depositary receipts in Sinopec Group’s listed arm, China Petroleum & Chemical Corp., rose 0.7 percent to $88.92 on Oct. 1. Repsol jumped to a two-year high, climbing 5 percent to close at 19.83 euros in Madrid, giving the company a market value of 24 billion euros ($33 billion).

Shares of other energy companies with stakes in Brazilian offshore projects advanced Oct. 1 after Sinopec Group’s investment in the Repsol unit was announced. Galp Energia SGPS SA rose as much as 7.8 percent in Lisbon, while BG Group Plc, the U.K.’s third-largest oil and natural gas producer, climbed as much as 5.8 percent in London.

“This puts a hefty valuation on reserves in Brazil,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “It could read through into BG’s assets.”

‘Surprisingly High’

Brazil’s state oil company Petroleo Brasileiro, known also as Petrobras, issued about $42.5 billion of stock to the country’s government last month in exchange for the rights to develop 5 billion barrels of oil reserves. Beveridge estimates Repsol’s assets in Brazil hold about 1.2 billion barrels of oil equivalent.

Spain’s biggest oil company has stakes in Brazil’s Santos and Espirito Santo basins and plans to invest as much as $14 billion there through 2019, in fields that may hold as much as 3 billion barrels.

The valuation of Sinopec Group’s stake purchase is “surprisingly high,” Banco BPI SA analysts Bruno Silva, Flora Trindade and Gonzalo Sanchez-Bordona wrote in a research note.

Repsol had considered a plan to sell about 40 percent of the Brazilian business through an initial public offering. The company now won’t be selling shares in the unit to the public, Madrid-based spokesman Kristian Rix said Oct. 1.

Too Large

“For us, Brazil was way too large,” Repsol’s Chief Operating Officer Miguel Martinez said in an interview on Bloomberg Television. “Obtaining a partner was a move that was necessary.” Repsol and Sinopec Group may work together in other areas in the future, he said.

Since 2007, Repsol and partners BG Group and Petrobras have found hydrocarbons in the offshore Carioca, Guara and Iguacu fields in the Santos Basin’s BM-S-9 block. They are ultra-deep deposits beneath a salt layer under the seabed.

Petrobras estimated in November 2007 that the Santos Basin’s pre-salt Tupi field may contain as many as 8 billion barrels of oil, the largest find in the Americas since Mexico’s Cantarell field in 1976. Repsol doesn’t own a stake in Tupi.

Repsol wants to invest in exploration in Brazil’s offshore Santos Basin and elsewhere to increase reserves and output, while trying to reduce exposure to mature fields in neighboring Argentina. The company forecasts annual production growth of as much as 4 percent through 2014 as projects in Brazil and Peru come on stream. Repsol plans to invest a total of 28.5 billion euros in the period.

Crude oil futures in New York have gained 16 percent in a year to $81.58 a barrel. Prices reached a record $147.27 a barrel in July 2008.

“If oil does go over $100 a barrel, then this deal may look very attractive,” said Beveridge of Sanford C. Bernstein. “It comes down to it either seeing more exploration potential here, or Sinopec’s betting on higher oil prices in the future to justify the price it is paying.”