CNPC to bring gas units under one fold

Energy producer China National Petroleum Corp is seeking to combine units to create a single gas company to compete with private rivals, ahead of an inflow of Russian fuel at the end of the decade, according to two company officials familiar with the project.

The plan under consideration would be for CNPC's Hong Kong - listed unit Kunlun Energy Co Ltd to buy unlisted PetroChina Kunlun Gas Co, the two people said, asking not to be named as the discussions are not public. Kunlun Energy is CNPC's main commercial gas supplier in China, while Kunlun Gas distributes fuel to households in more than 100 Chinese cities. Both companies are housed within PetroChina Co, State-owned CNPC's largest listed unit.

Kunlun Energy could pay more than $3 billion for Kunlun Gas, according to one analyst's estimate. The asset injection is being discussed for the second half of the year although precise timing has not been decided, company officials said.

CNPC's desire to combine commercial sales of liquefied natural gas with retail gas distribution is a long-standing one and was derailed last year by a government graft probe that snared two Kunlun Energy chairmen in quick succession, the officials said.

Shi Yan, an analyst at UOB Kay Hian Ltd in Shanghai, said: "Investors have been looking for a sign that the parent's support to Kunlun Energy has not been swayed by what happened last year."

Kunlun Energy rose 5.4 percent to HK$12.88 in early morning trade in Hong Kong, its biggest gain since October.

Qu Guangxue, CNPC's Beijing-based spokesman, did not answer two calls to his office seeking comment. Mao Zefeng, PetroChina's Beijing-based spokesman, said the company has no comment on the matter. A Hong Kong-based official at Kunlun Energy, who declined to give her name by phone, did not respond to e-mailed questions. Two calls to Kunlun Gas' general telephone line went unanswered.

The Russian deal, and China's need to reduce its reliance on more polluting fuels like coal, has contributed to a sharp rally in gas supplier shares - with Kunlun Energy an exception. At Wednesday's Hong Kong close, the company was down 6.6 percent over the past year, compared with an 83 percent gain in China Gas Holdings Ltd and a 29 percent advance for ENN Energy Holdings Ltd. Hong Kong's benchmark Hang Seng Index was up 10 percent.

UOB's Shi said Kunlun Gas could be worth between 10 billion and 20 billion yuan ($3.2 billion), based on a multiple of one or two times the value of its assets of some 10 billion yuan. China Petroleum & Chemical Corp, known as Sinopec, and ENN Energy, offered HK$15.3 billion to buy China Gas in 2011, at a multiple of 1.5 times, a deal which ultimately failed.

CNPC's strategy is to concentrate spending on higher margin energy exploration and production, rather than so-called downstream assets. By folding Kunlun Gas into a listed company, the arrangement would also align with the government's pledge to expand the influence of the free market on the economy.

CNPC is positioning itself to take advantage of its $400 billion deal with Russian supplier OAO Gazprom in May, the largest contract in natural-gas history. Under the accord, Russia will supply China with 38 billion cubic meters of natural gas a year from as early as 2018.

Former Kunlun Gas general manager Zhao Yongqi was appointed as Kunlun Energy's chief executive officer in December, a move that may help facilitate Kunlun Energy's acquisition of the gas unit, according to Shi of UOB.

Kunlun lost two chairmen - Li Hualin and Wen Qingshan - in August and December, as the government's crackdown on corruption zeroed in on CNPC. Wu Enlai was named as the company's new chairman last month. The company officials said the asset injection assumes no new scandals at Kunlun Energy or its parent.

Kunlun Gas was established in Beijing in 2008 with registered capital of 6 billion yuan, according to its website. Its distribution business has an annual capacity of more than 5 billion cubic meters. The company does not provide financial data such as revenue or income on its website.

Cost savings could come from linking the two sets of infrastructure for urban retail sales and out-of-town LNG stations used by trucks, and by sharing pipeline and storage facilities. Kunlun Gas could also draw upon fuel from the LNG terminals run by Kunlun Energy.

Investors' appetite for Kunlun Energy's stock has not recovered from the graft investigation, said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. The probe also snared other top CNPC officials, including former chairman Jiang Jiemin and deputy general manager Wang Yongchun.

"Many do worry about whether the new management at parent level will retain the commitment made by all the former leaders," Yu said. "The unreserved support from CNPC is the kind of special edge that no other natural gas supplier can compete with in China's market."

CNPC began to consolidate its natural gas business in 2009, allowing Kunlun Energy, formerly known as CNPC Hong Kong Ltd, to acquire LNG and pipeline assets and serve as CNPC's only platform for commercial LNG sales. The moves boosted CNPC's Hong Kong shares more than fourfold that year.

Kunlun Energy built more than 600 LNG fuel stations across the country in 2013, the company said in its annual earnings statement. The company's LNG processing capacity reached 7.18 million cubic meters in May and may expand to 17.38 million cubic meters by the end of the year, Goldman Sachs Group Inc said in a research note earlier this month.

Besides the Kunlun Gas deal, CNPC is also considering adding PetroChina's share of the Tangshan LNG terminal to Kunlun Energy, the company officials said. Kunlun already owns the group's two other large LNG facilities in Jiangsu and Liaoning provinces.