China’s CEFC signs agreement to take over Romania's largest refinery

China’s CEFC signs agreement to take over Romania's largest refinery
By Carmen Simion in Bucharest May 3, 2016

China Energy Company Limited (CEFC) will take a majority stake in KMG International (KMGI), the owner of Romania’s largest oil refinery, Petromidia, in a $680mn deal.

Privately owned CEFC, which is involved in the energy, financial and investment industries, has been very active in acquisitions in Central Europe in the past year.

According to an agreement signed on April 7, CEFC will purchase 51% of KMGI's equity shares for $680mn, after which the two sides will integrate their resources for joint exploration of international oil and gas markets. They also announced investments worth at least $3bn in the following five years.

The Chinese company and the Kazakh national oil and gas company KazMunaiGas (KMG) established on April 27 a joint venture in which CEFC will have a 51% participation and KMG a 49% participation.

The memorandum of understanding on the sale was concluded in Beijing last year within a broader package of $4bn worth of deals agreed between China and Kazakhstan. According to a Kazakhstani government decree from the end of last year, KMGI was included in a list of companies subject to privatisation. The Kazakh privatisation drive is designed to boost competition and fill government coffers amid falling revenue because of low oil and other commodity prices. 

KMGI, formerly the Rompetrol Group, was acquired by KMG in 2007. The company owns two refineries in Romania, Petromidia and Vega, as well as an integrated network of filling stations in EU countries and the Black Sea region.

As part of the agreement, CEFC undertakes to carry out investments in Europe and countries along the Silk Road in the future, a statement posted on the Bucharest bourse website said.

"The cooperation between CEFC and KMG is based on the strategic development objective, which will make KMGI a joint platform for both parties to achieve resources and performing strategy investment [...] We believe it will be a win-win cooperation for us to build a long term strategic partnership," CEFC executive director Zang Jianjun said in an April 29 statement.

The transaction is subject to a number of conditions, including final approval by various European, Chinese and other regulatory authorities. It is expected to be completed by October this year.

The value of the deal was not disclosed, but unnamed sources told Reuters last year that KMGI had been valued at between $500mn and $1bn. 

KMGI confirmed in December last year that an agreement between Romania’s government and KMGI on Rompetrol Rafinare’s ownership remained valid following the deal with CEFC.

Under the agreement, KMGI is supposed to take over 26.7% of Rompetrol Rafinare for $200mn and to set up an $150mn investment fund of which 20% would be transferred free of charge to the Romanian state. After the sale of its 26.7% stake to KMGI, the Romanian state will still hold 18% in the refinery.

“KMG International has already identified a number of profitable projects for the investment fund – the extension of fuel stations network on the local market, the construction of a new cogeneration plant on Petromidia platform, and continuation of investment in upstream exploration fields – to generate direct and indirect beneficial effects for Romanian economy, for the communities where these projects are going to be implemented, including total creation of approximately 2,000 jobs during different phases of the projects,” KMGI said in a statement back in December.

The Rompetrol Group was founded by Romanian businessman Dinu Patriciu. In 2007, Patriciu sold 75% of the company to the Kazakh state group, which later took over the remaining 25%.

KMGI controls Romania’s largest refinery Petromidia through Rompetrol Rafinare. The company reported $62mn net profit in 2015 from $58mn losses in 2014. The company thus broke even after 11 years in the red. EBITDA also increased by 30% y/y to $112mn.

Petromidia, which provides 40% of the country’s refining capacity, is expected to process 5.34mn tonnes of raw materials this year, compared to 4.95mn tonnes last year.