China Petroleum & Chemical Corporation or Sinopec SNP recently announced its intention to invest in the continued expansion to other countries. The state-owned company plans to inject a huge amount of funds to this end in order to bolster access to energy resources, which is China’s main foreign policy initiative.
Sinopec expects to enhance its foreign investment to over $30 billion. However, the company did not specify the duration of the increase. We note that the projected investment is almost double the $16 billion spent by the company between 2010 and 2015 in foreign investment in 30 countries, where it has 50 different projects.
The move is part a wider Chinese government initiative – One Belt, One Road (“OBOR”) – a major plan to support China's investment, influence and trade links to the rest of the world. This is expected to boost the country's global power, to help its support access to energy resources and to pursue growth abroad as the domestic economy slows.
The initiative has been appreciated by both state-owned and private firms. It facilitates companies to invest overseas more freely and evade tighter capital controls that have restricted overseas investment recently.
Sinopec’s balance sheet is strong. The company currently has a cash balance of 135 billion yuan ($19.56 billion), which makes continued overseas investment feasible. For decades, China has been importing energy resources to meet the increasing demand. To this end, the government has long encouraged energy firms to purchase overseas assets.
In 2013, Sinopec made one of its largest foreign investments by purchasing one-third of U.S. firm Apache Corporation's (APA) Egypt business for about $3 billion. We would like to remind investors that an upheaval had tumbled the democratically elected president and sparked deadly protests in the same period. Despite the unrest, Sinopec managed to obtain a stake in Egypt's valuable assets. Per critics of OBOR, Chinese companies do not have the know-how to cope with operations in areas where stability and security can pose a risk.
Sinopec’s Egypt venture has been a success. Despite low oil prices, the company continued to produce 350,000 barrels of oil per day in Egypt, resulting in a profit of $620 million. The firm reinvested about $1 billion by over the last three years, seeking long-term growth. It is also holding discussions to invest billions to help develop a petrochemical refinery complex south of the Suez Canal.
However, the main risk faced by the company is receiving the payment and this could be eased if more transactions are settled in Chinese renminbi, adding another possible currency to the pool to handle payments.
The Chinese government has been striving to globalize the renminbi. In fact, the acceptance of the currency into the International Monetary Fund's special basket of currencies last year was a symbolic move in that direction.
Investor confidence on the Sinopec stock is reflected in its price chart. Shares of the company have gained 4.5% in the last three months, while the Zacks categorized Oil & Gas –Integrated – Emerging industry registered a decrease of 1.5%.
Sinopec currently has a Zacks Rank #2 (Buy). Other stocks from the same space that warrant a look are SunCoke Energy, Inc. SXC, Exterran Corp. EXTN and Canadian Natural Resources Limited Ltd. CNQ. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SunCoke Energy posted a positive earnings surprise of 120.0% in the preceding quarter. The company beat estimates in two of the four trailing quarters with an average negative earnings surprise of 35.78%.
Exterran posted a positive earnings surprise of 123.21% in the year-ago quarter.
Canadian Natural Resources posted a positive earnings surprise of 30.77% in the preceding quarter. It surpassed estimates in two of the four trailing quarters with an average negative earnings surprise of 275.46%.
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