Tag Archives: OGXPY

Rethinking the SNP-REP deal

It turns out that Sinopec paid a somewhat bigger premium for its share of Repsol YPF’s Brazilian operation than anyone thought. This demonstrates how important access to oil is to China.

Last week’s $7.1 billion deal gives Sinopec (SNP, quote) access to 40% of Repsol’s (REP, quote) Brazil business and its roughly 1.2 billion-barrel oil reserves.

This means that the Chinese oil behemoth — the country’s second-largest behind CEO (quote) — is paying about $15 a barrel for its share of the new joint venture.

Earlier calculations pegged SNP’s stake at a far lower price, largely because they were based on more optimisic estimates of just how much oil REP has in the ground.

As it stands, the deal values REP reserves at a 76% premium over the $8.50 that Petrobras (PBR, quote) paid the Brazilian government for its new 5 billion barrels of crude projects.

At the time, traders groused about $8.50 being too expensive given the cost of developing the type of deep subsea wells that both PBR and REP will need in order to access their oil.

However, with China aggressively moving in the oil markets, higher valuations could be on the way for the entire group.

This should most quickly translate into higher prices for Latin energy producers, since this has been a key regional focus for China recently: OGX (OGXPY, quote) and thinly traded Galp (GLPEY, quote), as well as Petrominerales (PMGLF, quote) and Pacific Rubiales (PEGFF, quote):

Currently, not even ExxonMobil (XOM, quote) trades at $15 a barrel.

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China’s Repsol deal should boost oil names

Repsol will not go through with its planned Brazil IPO. Instead, the Spanish oil major is simply selling 40% of its Brazilian assets to oil-hungry Chinese refinery interests for over $7 billion.

Sinopec (SNP, quote) is paying $7.1 billion to turn Repsol Brazil into a joint venture worth about $10.8 billion. This translates into a 67% premium for the company’s assets — and confirms just how thirsty China still is for oil and other commodities.

Repsol (REP, quote) was originally slated to take the unit public on the Brazilian market later this year. However, this deal means that no IPO will happen.

The transaction gives SNP access to Repsol’s roughly 2 billion barrels of offshore Brazilian oil at a cash cost of around $5.40 to $6 per barrel.

This, in turn, is revealing: as hungry for oil as China is, it is only paying 50% of the $8.51 the Brazilian government charged Petrobras (PBR, quote) in its recent recapitalization. Is China overpaying? Maybe. Was PBR overcharged? From this, the answer looks like it might be “definitely.”

Going forward, look for this deal to be positive for Brazilian oil names like OGX (OGXPY, quote) and thinly traded Galp (GLPEY, quote), as well as PBR (quote) itself.

Obviously, SNP is out the cash and REP is getting the deal premium, so those stocks should move as well.

Beyond this, the deal raises the valuation for smaller exploration & production plays across the board. Take a look at Petrominerales (PMGLF, quote) and Pacific Rubiales (PEGFF, quote):

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