Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

No wonder China's big three petroleum companies have been reluctant to let go of their pipes.

The decision of China Petroleum & Chemical Corp. to sell a 50 percent stake in a pipeline unit for 22.8 billion yuan ($3.3 billion) gives investors a rare peek into the finances of a sector that's usually subsumed deep inside companies' consolidated accounts.

In contrast to U.S. energy companies, which have raised billions in capital over the past decade from divesting midstream oil and gas assets, Sinopec and its peers have kept their conduits resolutely in-house.

Spin City
Asian and European companies have trailed the Americas in raising cash from their pipelines
Source: Bloomberg
Note: Shows only spin-offs and equity investments, not full M&A.

The company's announcement Tuesday reveals why.

The pipeline in question, which connects eastern China to gasfields in the western province of Sichuan, posted net income of 1.169 billion yuan in the six months through June on revenue of 2.612 billion yuan and net assets of 1.835 billion yuan.

That translates into a phenomenally profitable business. The net income margin in the period was 45 percent. Even assuming the first half accounted for an outsized three-quarters of annual profit,   return on equity would have been 85 percent.

The East Is in the Black
Sinopec's pipeline unit is fantastically profitable for an infrastructure asset
Source: Bloomberg data, company announcement. Gadfly calculations
Note: Assumes that 75% of Sinopec net income occurs in the first half. ROE result would be higher with a more balanced seasonal mix.

Sinopec's junior partners China Life Insurance Co. and SDIC Communications Holding Co. are getting this asset rather cheaply. Jefferies estimates they're paying 1.16 times book value, a discount to the median 2.01 times valuation among 79 pipeline companies worldwide.

PetroChina Co. is caught up in the same game, announcing 15.5 billion yuan of pipeline sales last month as a result of a government drive to revamp the state's energy giants.

The overhaul is badly needed. As Gadfly has argued, the current setup of China's gas industry is a mess, designed in part to limit supplies of imported gas and channeling profits to energy giants, while it holds up the transition from coal-powered to cleaner gas-powered generation.

Tuesday's deal is just a taster of what is to come. The pipeline in question is barely more than 2,000 kilometers long, less than 2 percent of the distance covered by PetroChina and Sinopec's parent companies alone. If other assets are as profitable as this one, it's no surprise their parent companies have been loath to part with them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It would be higher if you assume a more balanced seasonal mix. The biggest U.S. pipeline operators, Kinder Morgan Inc. and Energy Transfer Partners LP, both got an average of about three-quarters of annual net income in their March and June quarters over the past five years. Williams Partners LP, the third-biggest, had the reverse scenario.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net