Share of the week: Sasol

Sasol, which started as a parastatal to convert South Africa' s coal reserves into usable liquid fuels and other chemicals, is rapidly turning itself into a gas-fired global energy behemoth .

The company is going full steam ahead on two gas-to-liquids (GTL) plants, while putting the brakes on two major coal-to-liquids (CTL) plants.

The company, which envisages expanding its capital expenditure budget from R25-billion in 2011 to over R30-billion in both 2012 and 2013, announced last week that it would be doing a pre-feasibility study on the establishment of a $10-billion GTL plant in the US state of Louisiana.

Ernst Oberholster, Sasol's managing director for new business development, explained the rationale for the decision: "We believe Sasol's proprietary GTL technology can help unlock the potential of Louisiana's clean and abundant natural gas resources."

This week it announced it had signed an agreement with partners, including Malaysia's Petronas, to develop its GTL project in Uzbekistan.

Sasol said in a statement that a feasibility study had shown the prospects for a GTL plant in Uzbekistan with an estimated nominal capacity of 1.4 million tons a year.

At the same time, the company stated that it was postponing its plans to construct a similar plant, albeit coal-fed, instead of natural gas, in the Chinese autonomous region of Ningxia Hui.

So far, Sasol had spent $120-million on the project, said senior group executive Lean Strauss.

It also made it clear that it had put the brakes on its domestic 80000-barrels-a-day coal-to-liquids Project Mafutha, owing to its "lack of a carbon capture and storage solution" and because of the government's "unknown" fiscal priorities.

The company announced its first financial results under the stewardship of new Canadian chief executive officer, David Constable, last week.

The results were impressive, as the company benefited from a relatively high oil price combined with astute cost containment.

Headline earnings a share increased by 27% to R33.85, while cash generated by operations increased 41% to R38.6-billion.

Overall company revenues came in at R142.4-billion, compared with the 2010 financial year's turnover of R122.2-billion.

The company overcame the strength of the local currency to post an impressive set of results as crude oil prices continued to climb in the period under review as a result of the economic recovery.

Chief financial officer Christine Ramon said the good performance was due to a range of factors. "Decisive management actions on operational efficiencies, cost control and business improvement plans have boosted the bottom line this year.

"Higher global commodity prices have supported the healthy margins delivered, particularly in our chemicals businesses, negating the impact of the strong rand.

"The global economy remains volatile, and our strong cash flows continue to underpin the robustness of our businesses," she said.

Mohamed Kharva, equity analyst at Nedgroup Securities, told Business Times that the results were generally in line with expectations.

The exception was the level of the dividend that was declared, "which was ahead of our expectations".

"Sasol's level of profitability is mainly driven by the level of the rand oil price. During the period under review, the Brent crude oil price was up 30%, whereas the rand strengthened 8%.

"Thus, a strong oil price was marginally offset by the strengthening rand."

The company seemed confident enough to declare a record-matching dividend of R13 a share, which caught some analysts off guard.

Kharva pointed out that the danger of declaring such a robust dividend was that the market would be disappointed if the company had to reduce the dividend in coming years as economic conditions deteriorated.

The share price was trading at R339.50 in mid-afternoon Thursday trade and was 13.4% higher than exactly a year ago, according to I-Net Bridge data.