China's oil and gas SOEs way ahead amid announcement of reforms

They've already introduced their own plans.

As China appears to be getting back on its SOE (state-owned enterprise) reform agenda, having recently announced a wave of reforms targeting at improving operational and asset efficiency, it has been noted that while the country’s oil and gas SOEs were not named in the first batch of pilot program for the SOE reform, they have already moved ahead of SOE peers in terms of reform.

According to a research report from Barclays, PetroChina and Sinopec have each introduced their own plans, more akin to mixed ownership, which include JVs and partnerships in different segments of their businesses.

Mixed ownership reform is the key for oil and gas SOEs, the report said. The pilot SOE reform plan released by SASAC on 15 July 2014 covered four key areas: 1) state asset investment, 2) mixed ownership, 3) evaluation of key management performances, and 4) inspection by the Central Disciplinary Committee.

For China’s oil and gas SOEs, we see the key area for reform as mixed ownership for an industry that usually operates as an oligopoly.

Here’s more from Barclays:

PetroChina set out six platforms for mixed ownership reform, as introduced by company Chairman Zhou Jiping during the annual National People’s Congress (NPC) in March 2014.

While we view the plan as well-rounded, reform in upstream was only limited to developing risky and unconventional resources.

Among these areas, PetroChina has moved most rapidly on divesting pipeline assets.

Before the Third Plenum set out plans to introduce mixed ownership in SOEs, PetroChina had already begun divesting natural gas assets to unlock value and reduce capital expenditure, starting with the sale of LNG terminals to Hong Kong-listed subsidiary Kunlun Energy.

In 2012, PetroChina sold a 48% stake in the then yet-to-be-built West-East 3 (WEP-3) pipeline to domestic strategic and financial investors.

In June 2013 it further transferred the western sections of WEP-1/2 into a JV where Guolian Fund and Taikang Asset paid RMB60bn for a 50% stake in these projects that had a NAV of just RMB20bn, according to PetroChina.

A pre-tax gain of RMB25bn was recorded by PetroChina on the transfer.

In May 2014, PetroChina announced its intention to divest the entire stake in the eastern portions of the first and second West to East pipelines (WEP-1/2).

While the transaction value will depend on the outcome of the public auction, we believe that the assets could sell at a premium, particularly if the precedent 2013 JV transaction is any guide.

The asset divestments have helped PetroChina reign in its capital expenditure and should further improve the company’s return profile.

The company cut capex by 10% in 2013 and has guided a 7% cut of capex in 2014, for example.

Sinopec announced in February 2014 that it plans to sell up to 30% of its marketing segment, Sinopec Sales (SS).

The company expressed its intent of selling the stake to key strategic investors, but with the company focused on selling the asset at a rich premium to NAV this could preclude meaningful participation from strategic investors, leaving domestic financial investors to anchor the deal.

Assuming a 15x 2015E P/E, similar to global valuation averages of fuel and convenience store companies, the sale of 30% of the marketing segment could raise an estimated cUS$20bn.

However, for Sinopec, while we believe the potential sale would be a positive, the overall impact is likely to be limited.