South African petrochemicals group Sasol Ltd. (SSL) has entered into a deal with Canadian energy explorer Talisman Energy Inc (TLM) to buy a 50% stake in the latter’s prolific Montney Basin shale natural gas assets in western Alberta and north-eastern British Columbia for approximately C$1,050 million (R7,413 million).
The transaction – second between the two companies in three months – is expected to close in the third quarter following regulatory and shareholder approvals. Per the agreement, Johannesburg-based Sasol and Alberta-based Talisman will split ownership in 57,000 acres of Talisman’s Cypress A properties that are estimated to contain 11.2 trillion cubic feet of natural gas.
In the first strategic partnership – signed in December 2010 and concluded last week – Sasol entered the North American shale gas market by agreeing to pay C$1,050 million to acquire a 50% interest in another of Talisman’s Montney shale properties, Farrell Creek, which holds an estimated 9.6 trillion cubic feet of gas.
The co-operation with Talisman is part of Sasol’s previously laid out plans for a significant outlay in upstream shale gas resources associated with its gas-to-liquids (“GTL’) projects in North America apart from unlocking additional value in the world-class Montney shale play.
In recent times, Sasol – a pioneer in the area of synthetic petroleum alternatives – 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, plans 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 25.
With gas prices remaining at depressed levels and thereby diverging significantly from high oil prices, Sasol is looking to utilize the spread by using its GTL technology that is expected to be more profitable than the company’s traditional business of producing motor fuels from coal.
Sasol 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.
SASOL LTD -ADR (SSL): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
Zacks Investment Research
