Sinopec's Quiet M&A Strategy

Staying away from headline-grabbing overseas M&A deals is a wise move for China's Sinopec, Asia's Largest Oil Refiner, Analysts Say.

Instead, Sinopec, or China Petroleum & Chemical Corp., has begun taking over upstream oil and gas assets held by its parent, Sinopec Group, as part of a strategy to establish itself as a global energy giant such as Exxon Mobil Corp. Until this year, the only asset it had acquired from the parent was a deep-water oil field in Angola in 2010.

But late last month Sinopec said it would form a joint venture with its parent to buy $3 billion worth of the parent's upstream oil and gas assets in countries including Kazakhstan, Colombia and Russia.

"Unlike its peers, Sinopec appears insulated from overseas M&A risks. We view parent asset injection as a much safer way to increase shareholders' value," Nomura analysts wrote in a note on Wednesday. They added that consultancy Wood Mackenzie put the value of the assets to be acquired by the joint venture at around $4.4 billion.

Sinopec's peers have been more boldly acquisitive recently. The biggest deal was Cnooc Ltd.'s $15 billion purchase of Canada's Nexen Inc., which closed in February with U.S. approval. Last month, China National Petroleum Corp. reached a $4.21 billion deal with Italy's ENI SpA for natural gas assets in Mozambique.

UBS says Sinopec Chairman Fu Chengyu is expected to "oversee fair asset injections," noting that he showed a knack for keeping badly run assets away from the listed company while at the helm of Cnooc, where he oversaw the company's ambitious overseas M&A drive.

Mr. Fu said last year that Sinopec plans to eventually buy all of Sinopec Group's overseas upstream assets. He has also said that Sinopec's strategy would focus on buying into projects, rather than making full acquisitions, to mitigate risk.

"We also believe the early injections will need to look reasonable if he plans to execute with market financing over the next three to five years," UBS says. To fund the purchase of assets from its parent, Sinopec raised $3.1 billion via a private share placement in February.

Jefferies has estimated that Sinopec Group, which owns around 73% of Sinopec, has around $40 billion of overseas upstream assets.