South African petrochemicals group Sasol Ltd. (SSL) expects results for the six months ended December 31, 2010 to benefit from cost cuts and higher oil/chemical prices.
In a trading update, the company said that first half headline earnings per share – the main profit measure in South Africa and excluding one-time items – is estimated to increase by 17–27% year-over year, notwithstanding an unfavorable exchange rate that continues to weigh on earnings from overseas sales.
Sasol’s financial results for the six months ended December 31, 2010 are likely to be declared on or about March 7, 2011. During the review period, Sasol also announced a significant outlay in upstream shale gas resources associated with its gas-to-liquids (“GTL’) projects in North America.
In recent times, Sasol has continuously focused on the commercialization of its GTL technology by constructing plants in gas-rich regions of the world that will strengthen its position in the industry in the coming years.
The company, which constructed the world’s first commercial-sized GTL plant in Qatar, recently announced plans to buy a stake in Canadian energy explorer Talisman Energy Inc’s (TLM) Farrell Creek gas assets for $1.06 billion and may also build a motor-fuels plant in western Canada. This is part of Sasol’s strategic plan to leverage the opportunity to arbitrage between gas and oil prices.
Under normal circumstances, the ratio of the price of oil (measured in $ per barrel) to the price of natural gas (in $ per million British thermal units) fluctuates between 6 and 12. However, in recent times, this has decoupled to an unprecedented degree, up at around 20. With gas prices remaining at depressed levels and thereby diverging significantly from oil prices, Sasol is looking to utilize the spread by using its GTL technology.
Based in Johannesburg, 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. The company also operates coal mines in South Africa to provide feedstock for its synthetic fuels plants.
Sasol is the operator of the only inland crude oil refinery in South Africa. It produces crude oil in offshore Gabon, supplies Mozambican natural gas to end-user customers and petrochemical plants in South Africa, and with partners involved in gas-to-liquids fuel joint ventures in Qatar and Nigeria.
Even though Sasol has a Zacks #2 Rank (short-term Buy rating) in the short run, we are Neutral on the ADRs in the longer term.
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