Sinopec's $8 Billion Purchase to Increase Debt Burden

China Petroleum & Chemical Corp. 600028.SH -0.71% may fund its $8 billion acquisition of assets from its parent by taking on additional debt, people with direct knowledge of the plan said, adding to an already-heavy debt burden and limiting its ability to acquire overseas properties.

Sinopec Corp., as the unit is widely known, is negotiating the purchase of exploration and production assets from China Petrochemical Corp. to increase its global footprint. Sinopec, Asia's largest oil refiner, will likely use bank loans and bonds to pay for the projects—in Russia, Colombia, the U.K. and Kazakhstan—the people said. The deal is expected to be completed in April.

The purchase would increase Beijing-based Sinopec's proven and probable oil and gas reserves by 12%, or around 960 million barrels of oil equivalent, Macquarie Group said. The deal would increase Sinopec's ratio of debt to shareholder equity. That debt ratio was around 50% in 2011, sharply higher than that of its Chinese peers.

State-owned China Petrochemical, which holds 76.28% of Sinopec Corp., owns a mix of conventional oil and gas reserves, unconventional oil-sands properties and shale-gas projects and deep-water resources valued at $32 billion, according to Wood Mackenzie. Its largest exploration and production assets are in Brazil, Canada, Angola, Australia and Argentina. Last month the company completed a $1.5 billion acquisition of a 49% stake in U.K. North Sea properties and in April it made its first foray into U.S. shale oil and gas, with a $2.44 billion deal.

It wasn't clear whether China Petrochemical planned to continue large-scale purchases and inject them into Sinopec. The unit, shares of which trade in Hong Kong, so far has acquired only one of its parent's properties, buying a deep-water oil field in Angola for $2.46 billion deal three years ago.

Analysts said further asset purchases would impose a heavy debt burden on Sinopec and questioned whether they would be made at fair market values.

Bernstein senior analyst Neil Beveridge said he expected that China Petrochemical would continue to be the major vehicle for overseas acquisitions, given Sinopec's debt level. "If the listed Sinopec is going to do all the international acquisitions, it means a slower pace of acquisition, because the funding capacity of the listed company is less than the parent," he said.

Bank of America Merrill Lynch was skeptical that Sinopec's purchases will be successful, citing a disappointing track record. Oil production from the Angola properties has declined 16% over the past three years. "Our initial assessment is that the profitability of those assets would be much lower than Sinopec's existing assets in China, given higher tax regimes and more difficult geological structures," the investment bank said.

Chinese oil and gas companies long have issued bonds to fund capital spending. But Sinopec is overextended compared with rivals Cnooc Ltd. 0883.HK -0.12% and PetroChina Co. 601857.SH -0.54% as its high exposure in refining and sales have left it vulnerable to government caps on fuel prices. Cnooc and PetroChina's debt ratios were around 10% and 30%, respectively, in 2011, much lower than Sinopec's 50%.

Cnooc said Wednesday that it would increase its capital spending around 50% this year, to between $12 billion and $14 billion, a large portion of which would go toward expanding overseas.

Exploration and production acquisitions will help Sinopec transform into an integrated global energy company, with substantial oil and gas reserves and a rapidly growing refining operation, potentially increasing its appeal to investors. The company is widening its international refining footprint; current projects include a joint-venture refinery in Saudi Arabia and another planned in South Africa.

But its plan to expand its domestic gas-distribution business was set back in October, when a plan to invest in China Gas Holdings Ltd. 0384.HK -1.63% failed.

Sinopec's shares rose 7% last year, compared with a 23% increase in the benchmark Hang Seng Index. The stock was little changed Thursday.