June 26,2009

Sinopec's Risk Taking Bid For Addax

By CT Johnson

Continuing China's commodities buying spree, Sinopec Group (Sinopec), China's largest petroleum refiner, made a $7.2 billion bid on Wednesday for Swiss oil explorer Addax Petroleum Corp. (Addax).  If successful, the acquisition would be China's largest ever oil acquisition.

Sinopec offered $52.80 per share for Addax, a 16% premium on Addax's closing market price on Tuesday and a 47% increase over its price on June 5, the day before acquisition talks were announced.  The Sinopec deal includes a $300 million breakup fee, Addax said.  The shares of both Addax and Sinopec rose on the news.

Addax, which was established only 15 years ago by CEO Jean Claude Gandur, produced 136,500 barrels per day in 2008. 

The Addax bid highlights China's appetite for commodities, even in distressed regions of the world.  "We trust that this acquisition suits Sinopec's strategic goals, that it will strengthen Sinopec's presence in West Africa and Iraq and is a major step in globalization," the company said in a statement.
"There's very few parties in the world that are interested in taking Africa risk at this stage," said Dan Barclay, head of acquisitions for BMO Capital Markets.  "Good reserves in stable places have been locked up by the big multinationals," says Nick Lardy, of the Peterson Institute. "If you're a new player and you have a substantial appetite for access to oil on some long-term basis, then you are more or less forced to go into high risk places where the majors are not willing to tread."

Addax owns key production assets in Iraqi Kurdistan, including a 45% interest in the Taq Taq field, considered one of Iraq's prime oil formations.  The field is currently producing 60,000 bpd and is expected to increase sharply as new wells come on line.

Unfortunately, the risks in developing the field are significant.  The Iraqi oil minister has declared production contracts like the ones held by Addax as illegal, saying that all such agreements must wait until a much-delayed oil law is signed.  Baghdad has also said that companies who participate in development in the Kurdish region ahead of the oil law will be barred from participating in contracts in other parts of Iraq.  For Sinopec, which is qualified to bid in Iraq’s first oil licensing auction, this may be a significant threat.

In addition to the considerable political risks in the region, the project faces infrastructure hurdles as well.  Although the Iraqi government allows companies to use state-owned pipelines to export their oil, there is no process in place for paying the companies for their oil. 

The Addax acquisition is the latest in a string of major overseas purchases by Chinese companies.  Earlier in the month, Chinese firms completed acquisitions of Australian miner OZ Minerals, GM's Hummer automobile division, and Singapore Petroleum.  Cash rich Chinese companies, taking advantage of prices depressed by the worldwide economic slowdown, have been snapping up international brands at an astonishing rate. 

China has shown particular interest in commodities, especially oil and metals.  On June 5, the Aluminum Corporation of China (Chinalco) lost a $19.5 billion bid to double its stake in Aussie mining giant Rio Tinto.  Rio backed out of the deal at the last minute and instead issued a rights offering and struck a joint venture agreement with hated rival BHP-Billiton.

Chinese companies have been buoyed by support from the Chinese government.  In December of last year, the central government changed financial regulations to allow banks to lend money for acquisitions, a practice that had hitherto been forbidden.  The acquisition activities of Chinese firms have been significantly helped by access to low cost loans from domestic lenders.  To further support the efforts of Chinese companies going abroad, the Ministry of Commerce relaxed its rules for approving overseas acquisitions, delegating approval for deals under $100 million to the provincial governments.  These policy changes have appreciably simplified the process for Chinese firms to engage in cross-border M&A deals.

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