October 1, 2010 / 6:43 AM / 7 years ago

China's Sinopec buys Repsol Brazil stake for $7.1 billion

MADRID/BEIJING (Reuters) - Chinese refiner Sinopec Group (0386.HK) will buy 40 percent of Spanish oil major Repsol’s (REP.MC) Brazilian arm for $7.1 billion, strengthening resource-hungry China’s presence in Latin America.

China has invested heavily in mining and oil assets in the region as well as in Africa in recent years and Friday’s deal puts it on course to be the biggest foreign direct investor in Brazil for 2010.

Sinopec is also bidding for oil and gas assets of Brazilian startup firm OGX worth a potential $7 billion, sources told Reuters last month.

For Repsol, the move delivers funds it needs to develop its deposits in Brazil, one of the world’s most important exploration markets since the discovery of massive subsalt oil reserves off its coast.

“We are delighted to share the development of the Brazilian projects with a partner with recognized prestige in the sector like Sinopec,” Repsol Chairman Antonio Brufau said in a statement.

Analysts and investors welcomed the deal, saying it valued the Brazilian assets at a premium to market consensus.

Repsol shares rose 5.6 percent to a 2-year high of 20.0 euros while construction firm Sacyr-Vallehermoso SVO.MC, which holds a stake of around 20 percent in Repsol, jumped 12.7 percent.

The deal also boosted shares in Portuguese oil company Galp (GALP.LS), which holds offshore assets in Brazil. Analysts said the giant Tupi field where Galp has a 10 percent stake is in a more advanced stage of development than Repsol’s blocks.

The Chinese stock market was closed for a national holiday.

POTENTIAL FOR MORE DISCOVERIES

China’s push into Latin America has focused on oil-producing Brazil, mineral-rich Peru and oil- and soy-producing Argentina.

The latest deal calls for Sinopec (600028.SS) to subscribe to a $7.1 billion capital hike in Repsol Brazil which will create one of the largest private energy companies in Latin America.

Merrill Lynch analysts in a note said the implied value of $10.7 billion for the 60 percent Repsol stake compared to analysts’ consensus value for the whole unit at $8-10 billion.

“It’s clearly positive, not only for Repsol but for all oil companies that have interests in Brazil,” said Jordi Padilla at Madrid-based fund manager Popular Gestion Privada. The firm, with 1.4 billion euros ($2 billion) of assets under management, holds Repsol shares.

    Sinopec said the company was targeting the production of 200,000 barrels per day oil equivalent from the mostly offshore blocks.

    “It’s a large-scale asset of premium quality and potentially with more discoveries to be made in the future,” a Sinopec official told Reuters.

    Repsol expects production of more than 50 million barrels per year by 2018-2020 from the Brazil deposits it currently holds, Chief Operating Officer Miguel Martinez told Reuters Insider.

    The deal, which will require approval from competition authorities, is on a par with Sinopec’s acquisition of Swiss oil and gas explorer Addax for some $7.24 billion, with assets in Nigeria and Iraq’s Kurdistan region.

    Repsol, in partnership with Brazilian state-run oil company Petrobras (PETR4.SA), has a stake in some of the larger deep-water subsalt blocks off Brazil’s southern coast, including a 25 percent stake in BM-S-9 which holds the Guara and Carioca fields.

    Guara holds 1.1 billion to 2 billion barrels of recoverable oil. Carioca is considered a promising field as well but has not yet yielded production estimates.

    Repsol’s Brazilian unit requested permission from the market regulator to issue shares on the Brazilian stock exchange in August. The initial public offering is now off the cards, Repsol’s Martinez said.

    Additional reporting by Tracy Rucinski; Writing by Sonya Dowsett; Editing by Dan Lalor, Jason Neely

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