Chevron To Sell South African Assets To Glencore For $973M

Chevron Corporation (NYSE:CVX) recently clinched a deal to divest stakes in South Africa business to Switzerland-based diversified resource companyGlencore plc (OTC:GLNCY) . With the deal, Glencore (LON:GLEN) will secure its first major refinery in the continent, in sync with its aim to expand through strategic acquisitions.

Last year, U.S. energy giant Chevron announced plans to unload 75% interests in South Africa assets as part of its three-year divestment goals announced in 2014. In October 2016, energy firms like France’s integrated oil and gas major TOTAL S.A. (NYSE:TOT) , Glencore, Russian oil trader Gunvor Group Limited among others had put in bids to snap up stakes in Chevron’s South Africa business.

In March, Chevron announced plans to divest the assets to Asia’s largest oil refiner, China Petroleum & Chemical Corporation (NYSE:SNP) , also known as Sinopec. However, the deal got stalled due to delays. Concurrently, Chevron’s Black Economic Empowerment partners — who own 25% stake in the South African assets — reopened the sales process by exercising their pre-emption rights and Glencore was selected due to the better terms and conditions it offered.

Deal Highlights

Per the deal, Glencore will acquire 75% controlling stake in Chevron’s South Africa and Botswana assets 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. The remaining 25% interest will be owned by the consortium of Black Economic Empowerment shareholders. Last year, Chevron earned $138m as pre-tax profits from the South African business unit. Glencore will also remain part of Chevron’s management team and workforce from its South African business unit.

The divestment deal is valued at $973 million and is subject to approval by regulatory authorities. The deal will be funded by Glencore’s cash reserves and is expected to get closed by mid 2018.

Deal Motive

The deal is well aligned with Chevron’s $15 billion 2014 divestment program as the company is focusing on balancing its global portfolio with its long-term business priorities. It will help Chevron to slash costs and streamline business models.

For Glencore — which already has extensive portfolio of assets in South Africa — the current acquisition is likely to strategically complement its existing assets and provide a lucrative downstream opportunity. The company set foot in Mexico’s fuel retail market in August. If this deal gets finalized, it will help the company foray into South Africa’s downstream markets, which is large and growing with proper regulatory framework for import parity pricing. The deal will enable Glencore to increase its market share and revenues in the fuel retail market.

Glencore is currently focusing on accelerating its acreage and acquisitions lately, given that oil prices have rebounded from their historic lows and have started to stabilize. The improving commodity market has boosted the earnings of the company which is now undertaking share buy backs, strategic acquisitions and hiking dividends. Few days ago, the company boosted its holding in Peruvian miner Volcan for $530 million. Few months back, Glencore acquired coal mines in Australia for $1.1 billion from mining company Rio Tinto (LON:RIO) plc.

Zacks Rank

Chevron is one of the largest publicly traded oil and gas companies in the world, based on 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. Over a year, shares of Chevron have rallied 12.6% compared with roughly 4.7% gain recorded by the Zacks Investment Research

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Written By: Zacks Investment Research