Financial Times: Chinese oil: “China's three oil majors have a mandate from Beijing to go forth and spend. They also have the cash. The three - CNOOC, PetroChina and Sinopec - have a combined market capitalisation of about $150bn”:   “Potential targets include Royal Dutch/Shell's 34 per cent stake in Australia's Woodside Petroleum (ShellNews.net) 11 Dec 04

Published: December 11 2004

Now that IBM's personal computer business is set to move into Chinese hands, will there be more such cross-border deals? One sector that looks intriguing is oil and gas. China's three oil majors have a mandate from Beijing to go forth and spend. They also have the cash. The three - CNOOC, PetroChina and Sinopec - have a combined market capitalisation of about $150bn and command valuations on a par with global second-tier integrated oil companies. Their financial firepower would be even stronger in the event of currency revaluation.

Potential targets include Royal Dutch/Shell's 34 per cent stake in Australia's Woodside Petroleum and Hutchison Whampoa's stake in Canada's Husky Oil. Price tags, at market value, range from $3.5bn to $4.2bn, which are manageable. PetroChina, for example, could comfortably borrow $12bn, given its modest gearing. Yet two factors argue against a Chinese oil swoop overseas. First, the Chinese trio have shown some restraint in overseas acquisitions. CNOOC has not generally overpaid, and has stuck to investing in assets and projects, not operating companies. Second, the indications are that China will decant state assets into PetroChina. These could command a price of up to $5bn, but its most productive assets might not be included. As their cash balances and low gearing suggest, China's oil majors have struggled to invest enough. But they would struggle even more to trump returns on existing operations. If oil companies refuse to join the move overseas, investors should be relieved.