China’s Biggest Oil Refiner Refocuses on Exploration -- and Profit

Investing in oil companies in China is about to become a lot more profitable.

Last November, China's leaders called on private investors to play a bigger role in the country's economic revival as they unveiled a new package of economic reforms. Investors can now turn to China's biggest oil refiner, China Petroleum & Chemical (SNP_), more common known as Sinopec. The company has decided to sell some of its marketing operations to outside investors.

The company's move is a big step in the right direction, as it can now increase its focus on its exploration and production unit, from which Sinopec gets more than half of its income. Moreover, by selling its stake in the marketing business, Sinopec can continue growing its reserve base without amassing additional debt.

By increasing its focus on higher-margin operations, Sinopec will be able to improve shareholder return. Wall Street has reacted positively, and Sinopec's American depository receipts bounced up by more than 9% to $84.30 from the announcement until the markets closed on Friday, Feb. 21. Since then they've sunk a bit to $82.21. Despite the surge, the company's shares are now trading just 8.5 times its trailing earnings, which make it an attractive investment.

China has been suffering from an economic slowdown and is expecting one of the slowest annual growth rates in more than two decades. To encourage a turnaround, Chinese officials introduced new economic reforms. The government asked the private sector to play a bigger role in China's future, as the country moves towards mixed-ownership economy. As part of these efforts, an overhaul of the country's enormous oil companies was also expected.

Subsequently, Sinopec's board has agreed to restructure and diversify the ownership of its marketing business by selling up to 30% of its shares. Sinopec's marketing segment includes China's biggest network of around 30,500 gasoline stations, nearly 10,000 km of pipelines and more than 15,000 cubic meters of storage facilities.

Analysts have put a price tag of more than $20 billion on that 30% marketing stake. This means that in the eyes of Wall Street, Sinopec's massive oil marketing operations are valued at more than $66 billion.

Sinopec has recently raised $3.1 billion in private share placement, as it intends to purchase around $8 billion in assets from its parent, Sinopec Group.

Eventually, Sinopec will acquire between $30 billion and $40 billion in assets from its parent as it aims to compete with the big boys of the oil industry such as ExxonMobil (XOM_) and Chevron (CVX_).

Therefore, the current sale of its stake comes at a good time for Sinopec. It eliminates the need to raise further debt.

The company's decision to divest some of its marketing assets is also in line with the general global trend in the energy space. More and more oil and gas companies, including China's biggest oil producer PetroChina (PTR_), have been divesting from their marketing and infrastructure assets to increase their focus on the exploration and production side of the business. This is because the latter is considerably more lucrative.

(thestreet.com ,edited by Topco)