SINOPEC Corp(600028.SH)'s joint bid to buy China Gas Holdings Ltd last week signals that a new wave of consolidation may be brewing in China's gas distribution sector, putting Sinopec in more direct competition with rival PetroChina Co.(601857.SH)
The HK$16.7 billion (US$2.2 billion) offer for Hong Kong-listed China Gas, though rejected initially, could help Sinopec, Asia's largest oil refiner, to expand rapidly into downstream gas distribution.
That would be in keeping with the company's strategy to transform itself into an integrated energy company. It would also be in keeping with the Chinese government's goal of tripling the nation's gas consumption in the next decade to 300 billion cubic meters, thereby reducing dependence on expensive oil and dirty coal.
Sinopec and ENN Energy Holdings, another city piped-gas distributor, bid HK$3.50 a share for all outstanding shares of China Gas. The offer was at a 25 percent premium to its previous close.
"The offer made to China Gas indicates another round of consolidation may be underway in the gas distribution industry, which should help support the valuations of gas distributors," China International Capital Corp analysts Stephen Zhang and Xia Ziying wrote in a note.
If a deal was done, ENN and China Gas would become the largest listed downstream gas utility in China, with combined sales of more than 10 billion cubic meters a year, analysts estimated.
Returns on investment
Chinese gas distribution companies purchase gas primarily from PetroChina at prices set by the National Development and Reform Commission. They then sell the gas on at prices set by local government bodies.
Analysts said returns on investments in the business, where regulatory risk appears low, are attractive amid strong gas demand, and the commissioning of China's second west-to-east gas pipeline will save city gas distributors the cost of trucking gas into provinces such as the industrial hub of Guangdong.
Still, gas distributors, as intermediaries, may face margin pressures that they cannot offset. Notwithstanding the various new pipelines and liquefied natural gas terminals being built, disruption in gas supply is outside of the control of the distributors, many of them privately owned.
The natural gas sector has become a beehive of corporate activity.
China Resources Gas Group in October offered HK$795.13 million to take its 56.9 percent-owned unit, Zhengzhou China Resources Gas Co, private. It said the move was aimed at reducing potential conflicts in allocating resources or investments and acquisitions.
For its part, PetroChina has been injecting city piped-gas assets into its Kunlun Energy Co unit. On Tuesday night, Kunlun said it received approval from the Ministry of Commerce for its acquisition of the 60 percent interest in Beijing Gas Pipeline Co from PetroChina. This is the last regulatory approval requirement for the major deal that will make Kunlun a play on Chinese gas consumption growth.
Last June, the parents of PetroChina and China Resources formed a strategic alliance on gas distribution and other businesses.
Sinopec's upstream gas production is only a fifth that of PetroChina's, and its cross-provincial pipeline network and gas sales volumes are also dwarfed by its rival, according to Nina Yan, analyst at UBS Securities.
Buying China Gas - which operates 151 city piped-gas projects in 20 provinces, supplying 6.6 million residential customers and nearly 42,000 industrial and commercial users - would help Sinopec catch up in the downstream gas sector as the company ramps up gas production, Yan said.
China Gas also owns some compressed natural gas refilling stations that could complement Sinopec's auto-related gas business and some distribution projects for liquefied petroleum gas, for which Sinopec is China's largest producer, she said.