Chevron & Sinopec's South Africa Deal Receives Green Signal

Chevron Corporation's (NYSE:CVX) efforts to divest its stake in its South Africa business to China Petroleum & Chemical Corporation (NYSE:SNP) , better known as Sinopec, has been approved by the country’s Competition Commission.

Notably, Sinopec will acquire 75% stake in the assets through its subsidiary, SOIHL Hong Kong Holding Limited. With the completion of the deal, SOIHL — a manufacturer and supplier of petroleum and petrochemical products — will enter the South African petroleum market.

In 2016, Chevron had stated its intention to unload 75% interests in its South Africa assets as part of its three-year divestment goals announced in 2014. Many energy firms like France’s integrated oil and gas major TOTAL S.A. (NYSE:TOT) , Switzerland-based diversified resource company, Glencore (LON:GLEN) PLC (OTC:GLNCY) and Russian oil trader, Gunvor Group Ltd had put in bids to snap up stakes in Chevron’s South Africa business. However, Sinopec was selected on better terms and conditions it offered.

Following the approval from the Competition Commission, Sinopec will acquire 75% controlling stake in Chevron’s South Africa and Botswana assets for $900 million including a 100,000 barrel per day oil refinery in Cape Town, a lubricants plant in Durban and a network of around 820 gas stations.

Sinopec will establish an office in South Africa to enable it to supervise its operations in the region. No employees from the facilities will be curtailed following the acquisition. The remaining 25% interest will be owned by local shareholders.

Sinopec will continue with Chevron’s Caltex brand name for the retail fuel stations for around five years till it forms a rebranding strategy. The company will also be making technological upgrades at the acquired assets to meet the local demand and drive growth for the indigenous oil industry.

The deal is in line with Chevron’s $15 billion divestment program announced in 2014 as the company focuses on balancing its global portfolio with long-term business priorities. It will help Chevron cut costs and streamline its business models to help it concentrate more on the assets producing higher margin barrels.

About the Company

San Ramon, CA-based Chevron is a Zacks Rank #3 (Hold) company and one of the largest publicly traded oil and gas entities in the world as per proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals and other energy-related businesses. The company divides its operations into two main segments: Upstream and Downstream. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Owing to Chevron's focus on well planning and execution, the company continues to reduce its operating costs with underlying expenses, down almost 5% year to date compared with the figures recorded in 2016. Cash capital expenditures for the first nine months of the year also declined 30%. However, we remain worried over signs of headwind in Chevron's U.S. production. Chevron's exposure to production in the vulnerable and violence-prone regions in Nigeria poses additional risk.

Chevron has gained 9.2% in a year compared with 8.8% growth of its industry.

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