We have retained our Neutral recommendation on South African petrochemicals group Sasol Ltd. (SSL).
Incorporated in 1979, Sasol is an integrated energy and chemicals company. It is the leading provider of liquid fuels in South Africa and a major international producer of chemicals.
Sasol is fairly unique compared to other international oil companies as it has limited conventional exploration and production operations and uses a proprietary technology (Fischer-Tropsch) to manufacture synthetic fuels (synfuels) and chemicals from low-grade coal and natural gas. Sasol manufactures more than 200 fuel and chemical products that are sold worldwide.
We like Sasol for its diverse portfolio of assets that produce a wide array of chemical and liquid fuels. The company specializes in gas-to-liquids (GTL) and coal-to-liquids (CTL) technologies, which convert natural gas and coal to diesel and other liquid fuels. Recently, these technologies have been attracting attention because they provide an alternative to traditional oil.
With gas prices remaining at depressed levels and thereby diverging significantly from oil prices, Sasol – through its upstream North American shale gas investments – is looking to utilize the spread by using its GTL technology. This is expected to be more profitable than the company’s traditional business of producing motor fuels from coal.
In this regard, the Johannesburg-based entity has recently signed two transactions with Canadian energy explorer Talisman Energy Inc (TLM) to enter the North American shale gas market.
Additionally, Sasol’s deleveraged balance sheet and strong cash position keep the group well-equipped to weather the global economic storm and fund its growth program in tough credit markets.
However, we remain concerned by the group’s unfavorable operating environment – characterized by a strong domestic currency and weaker refining margins – and its expensive growth strategy.
Given Sasol’s strong balance sheet and net cash positive status, the company can pursue an aggressive CTL and GTL growth program. However, we believe this will stretch Sasol’s medium-term returns significantly, as the company would have to deploy a considerable amount of capital in gestation until the project starts, which is not expected before 2015.
As of now, we don’t see any obvious catalyst in its business that would significantly push the stock price higher. Consequently, we see Sasol ADRs performing in line with the broader market.
