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DEALWATCH: China Continues Foreign Asset Grab

Last Update: 8/10/2009 3:12:14 PM



By Kevin M. Nichols and Jamie Miyazaki
A DOW JONES NEWSWIRES COLUMN


NEW YORK/HONG KONG (Dow Jones)--China's seemingly insatiable appetite for global
energy assets has fueled the energy sector's mergers and acquisitions lately. The
latest deal in the space demonstrates China's ability to pay top dollar and
perhaps even its willingness to overpay at points.

China National Petroleum Corp. and Cnooc Ltd. (CEO) reportedly have bid $17
billion for all of Repsol YPF SA's (REP) stake in its Argentine oil and gas unit
YPF SA.

The deal would mark the largest overseas investment by a Chinese company,
trouncing the record broke just over a month ago when China Petrochemical &
Chemical Corp., or Sinopec, acquired Addax Petroleum Corp. for $7.2 billion in
cash.

It remains to be seen whether Chinese companies, hoping to thwart political
opposition that has killed past Chinese-led deals, such as Cnooc's attempted
purchase of Unocal in 2005 and a deal by Aluminum Corp. of China (ACH), or
Chinalco, to provide capital to Rio Tinto PLC (RTP) earlier this year, are now
going to pay top-of-the-range premium to win over shareholder and political
support.

In this case, China is vastly overpaying. Argentina's Grupo Petersen bought a
14.9% stake in YPF in February 2008 that included an option to add up to 10% more
in YPF by 2012 if it so chose. Grupo Petersen's investment implied a $15 billion
valuation for the whole of YPF back then.

The latest bid implies a $22.7 billion valuation for the entire company if Repsol
is selling a 75% ownership stake. It is unclear how the involved parties will
treat the 10% option held by Grupo Petersen and if the selling stake is actually
as high as 85%, which would imply a valuation of $20 billion for YPF. Neither
Repsol nor Cnooc have publicly commented on the deal.

Grupo Petersen, controlled by the Eskenazi family, ultimately bid for the entire
float, not owned by Repsol, of YPF in May 2008 for $49.45 per share; its current
ownership is 15.46%.

But oil and gas fundamentals have since changed. The price of crude oil is down
28% since the Grupo Petersen/YPF deal closed, the price of natural gas has
declined 55% over the same time period, and from a state of excess demand there's
now excess supply of oil and gas.

But it's not as if China is blindly overpaying for any energy asset - YPF SA does
have attractive assets and fundamentals. The unit has contributed more than 19%
of last-12 months' revenue and more than 30% of last-12 months' operating profit
for parent Repsol YPF SA.

As of year end, it had $16.7 billion in assets, which include pipelines, port
terminal facilities and power stations among its crude oil and natural gas
production portfolio. On an assets basis, CNPC and Cnooc's reported bid is a
slight premium to fair value for assets.

While extremely volatile like any energy stock, YPF SA shares have remained
basically unchanged over the last year.

If the reported price is right, CNPC and Cnooc have their work cut out. In the
last year, YFP's oil and natural gas output fell 4.6% and 4.4% respectively. Oil
reserves declined 4.1% and gas reserves fell 16.4% over the same time period. But
considering YFP has 768 million barrels of oil equivalent in proven reserves,
CNPC and Cnooc will certainly look to use this untapped resource to boost
production.

Argentina as a nation has faced declining production for the past decade,
producing 916,000 barrels of oil per day in 1998 to around 750,000 barrels of oil
per day today. Argentina is a net exporter of oil. YPF produces around 311,000
barrels of oil per day and 1.66 million cubic feet of natural gas per day.

Yet other companies willing to unload Latin American oil and gas assets should be
wary of using deals like these as a benchmark for pricing. China is a unique
buyer that can currently afford rich prices.

(Kevin M. Nichols is a columnist for Dow Jones Newswires on the energy,
industrial and auto sectors. He has more than seven years experience as an
analyst and trader on Wall Street and was formerly an executive in the
proprietary trading unit at an investment bank. He can be reached at +1 (212)
416-2104 or by email: [e-mail]. Jamie Miyazaki can be reached
at 852-2832-2320 or by email at [e-mail]. Dow Jones Newswires
is enhancing its news, commentary and analysis for the investment banking
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(END) Dow Jones Newswires

August 10, 2009 15:12 ET (19:12 GMT)