Sasol Boosted by Oil Price, Cutting Costs, Rates Short-Term Hold

| About: Sasol Limited (SSL)

Sasol Ltd. (NYSE:SSL) announced strong results for the six months ended December 31, 2010, aided by higher oil prices and cost control initiatives, but partially offset by an unfavorable exchange rate.

The South Africa-based petrochemicals group reported headline earnings per share, excluding one-time items, of R12.98 (U.S.$1.95), up from R10.69 (U.S.$1.40) earned during the corresponding period last year. Operating profit rose 14.8% to R12.0 billion.

Segmental Analysis

South African Energy Cluster: Within its South African energy cluster, Sasol Mining's operating income plummeted 17.7% to R140 million, hampered by lower production and sales volumes as well as unfavorable currency fluctuations. These were partially offset by higher U.S. dollar export coal prices.

Sasol Gas generated an operating profit of R1.3 billion, up 8.8% year-over-year. The positive comparison can be attributed to higher sales volumes, somewhat negated by lower gas prices.

Sasol Synfuels' operating profit fell 11.3% to R5.4 billion, mainly reflecting lesser production volumes together with higher feedstock and energy costs, partially canceled by higher average oil prices.

Sasol Oil reported an operating profit of R665 million as against R680 million in the prior-year period. The decline primarily resulted from exchange rate fluctuations and weaker refining margins. To some extent, these factors were offset by increased sales volumes and higher wholesale margins.

International Energy Cluster: Sasol Synfuels International recorded an operating profit of R539 million, up significantly from R112 million earned during the previous year period. The improvement was due to higher production at the Oryx gas-to-liquids plant in Qatar and higher crude oil prices. These were partly negated by unfavorable currency fluctuations.

Sasol Petroleum International's operating profit improved 44.2% year-over-year to R333 million, mainly reflecting higher energy prices, a favorable exchange rate, and higher sales volumes from the Temane operations in Mozambique. Partially offsetting these effects were lower sales volume from the Etame oil field cluster in Gabon.

Chemical Cluster: Sasol Polymers reported an operating profit of R574 million, as against a loss of R137 million in the prior year comparable period. The segment results were favorably affected by increased output and the turnaround in international polymer prices, partially offset by foreign exchange translation differences.

Sasol Solvents' operating income more than doubled from the previous year level to R440 million, driven by stronger margins, whose effect was partly mitigated by the strength of the rand against the US dollar and lower production volumes.

Sasol Olefins & Surfactants reported an operating profit of R1.6 billion, a considerable improvement over the income of R904 million during the corresponding period of 2009. The positive comparison came on the back of improved margins and strength in demand, partly offset by foreign exchange impacts.

Operating Cash Flow & Capex

The oil-from-coal company generated R15.1 billion in operating cash flows, a 64.3% year-over-year increase, primarily due to increased operating profits and lower working capital. Additionally, Sasol spent R9.2 billion in capital expenditures during the period.


The company announced a 10.7% hike in interim dividend to R3.10 per share. The dividend will be paid on April 11 to shareholders of record as on April 8, 2011. The holders of American Depositary Receipts (ADRs) will be paid on April 21, 2011.


Looking ahead, Sasol management remains cautious in its fiscal 2011 outlook. The company – a pioneer in the area of synthetic petroleum alternatives – sees some signs of demand and price recovery but at the same time reiterated that economic conditions still remain challenging.

A stronger Rand/U.S. dollar exchange rate and weaker refining margins are the main concerns. However, the rise in oil prices on the back of instability in the Middle East and North Africa and the ensuing risk to supply is helping Sasol combat these issues.

In response to the global economic crisis, Sasol has acted swiftly to improve its competitiveness and make the business more robust. The company has adopted a cash conservation approach and reduced its capital expenditure forecast for the three year period (2009 – 2011) by approximately 40%.

Additionally, Sasol has restructured businesses (where required) and accelerated programs across the group aimed at improving efficiencies and cutting unit costs.

This is expected to position the company for sustainable, long-term profitability and growth.

Our Recommendation

Sasol, which recently closed its previously announced acquisition of a stake in Canadian energy explorer Talisman Energy Inc’s (NYSE:TLM) Farrell Creek gas assets for approximately $1 billion, currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the ADR.

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Tagged: , Major Integrated Oil & Gas, Earnings, South Africa
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