Sinopec Pipeline Sale Unlocking $6 Billion of ‘Overlooked’ Value

  • CICC values the pipeline assets at as much as 40 billion yuan
  • Sinopec: Each investor must invest at least 1 billion yuan

China Petroleum & Chemical Corp.’s decision to sell up to 50 percent of a natural gas pipeline unit could value the asset at as much as $6 billion and help boost short-term profits, according to analysts.

The Sichuan-to-East China Gas Pipeline Co. could be worth as much as 40 billion yuan ($6 billion), Guan Bin, a Hong Kong-based analyst at China International Capital Corp, said in a report Wednesday. Sanford C. Bernstein & Co. values it at 29 billion yuan.

The sale could deliver as much as 14 billion yuan in after-tax profit to shareholders of Sinopec, as China Petroleum is known, Guan said. Bernstein analyst Neil Beveridge estimated a 5 billion yuan profit to shareholders in a report. 

Sinopec approved the stake sale in its cross-country pipeline to outside investors on Tuesday, following a similar sale by state-owned peer PetroChina Co. in November. 

On Wednesday, the refiner said it will invite “no more than 15” investors for the pipeline asset sale in a statement to the China Beijing Equity Exchange.

Each investor has to invest “at least” 1 billion yuan for a stake in the unit and Sinopec will only accept cash, according to the statement. Qualified individual investors must have at least 4 billion yuan in total assets, or manage at least 6 billion yuan, it said.

“Sinopec highlights the real value of its pipelines, and is arguably unlocking overlooked value, to the extent this transaction involves it receiving cash,” Macquarie Research’s Hong Kong-based analyst Aditya Suresh said in a research note.

Sichuan to East

Sinopec started operating its Sichuan to eastern China gas pipeline that links to the Puguang gas field in 2009, it said in the statement. The 2,229 kilometer (1,385 mile) pipeline, which transmitted 8.3 billion cubic meters of natural gas in 2015, links six provinces and two municipalities, including Shanghai. The company invested 63 billion yuan to build the pipeline, according to the state-controlled People’s Daily. 

Money raised from the sale will be used to build more natural gas pipelines, expand capacity and build storage facilities, it said. Sale proceeds may also go to supporting operations, repaying debt and improving capital structure.

Not Reform

Sinopec’s pipeline sale is another sign that the government will no longer seek to spin off its pipeline assets into an independent company, according to Beveridge.

“Pipeline reform is off the table for now,” he said. “This deal mirrors recent PetroChina pipeline transactions designed to boost near-term profitability rather than reform.”

PetroChina sold a 50 percent stake in the Trans-Asia Gas Pipeline Co. to a unit of China Reform Holdings Corp. for $2.4 billion. PetroChina’s state-owned parent China National Petroleum Corp. decided in June to invest in expanding a major natural gas pipeline after determining the government’s pipeline spinoff plan has been shelved, Bloomberg reported last month.

“This transaction is about financial engineering and not reform,” said Bernstein’s Beveridge. “With 63 billion yuan in cash, Sinopec does not need to raise funds from asset sales.”

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