Tuesday, March 28, 2006

Sinopec (SNP) May Be Biggest Beneficiary Of Block 1 Find, But It's A Big Loser Today

The billion-barrel oil discovery in Block 1 may benefit China's Sinopec more than its discoverers if a substantial part of the reservoir lies beneath Block 2 and Sinopec doesn't have to drill a well to start earning royalties from it.

While ERHC Energy also stands to gain, as does Addax Patroleum, it is the Asian oil giant - the second-largest (after CNOOC) in China and the sixth-largest in the world - that will reap untold millions if as much of the Block 1 oil is under Block 2 as rumored.

In early trading today, investors were exiting ERHE, bringing the ashare price down $0.059 by 10:20am ET on volume of 1,216,000 shares.

So far, no one has suggested the rumors are untrue, and the contrary may be the case: they may be sitting on more oil than rumored.

Much of that conundrum will be sorted out today when executives of ChevronTexaco and ExxonMobil meet today to plan strategies for announcing the find and exploiting its substantial dimensions.

Meanwhile, Sinopec has been hit by poor first-quarter earnings reports, and slipped more than $1 yesterday to close after hours at $60.39. By 10:22am ET this morning, Sinopec's ADRs were trading $2.43 lower at $57.74, down 4 percent, on the news that China intends to stamp a windfall profits tax on oil that company officials said will "certainly cut into our profits." Unlike in a democracy, no action by an elected and representative legislative body is required to impose such a tax - one peril of working with Communists.

The stock has not yet discounted the likelihood of participation in the Block 1 find, however, while an Afren map (see Slide 17) in a recent financial presentation shows it is likely to do so.

If, as expected, traders buy on the bad news, they may find themselves in line to reap on the good.

Disclosure: ERHC On The Move has 380 shares of Sinopec for just such an eventuality. We also have 17,500 shares of ERHC Energy purchased between $0.865 and $0.885.

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