South Africa-based petrochemicals group Sasol Ltd. (SSL) has entered into a gas exploration deal in Mozambique. The company, through its wholly owned upstream oil and gas subsidiary Sasol Petroleum International (“SPI”), has signed an agreement in this regard with the Mozambican government.
As per the contract, Sasol will look for gas in Area A of the Mozambique Basin in the vicinity of its existing Pande and Temane gas fields, where the South African giant has been exploiting natural gas since 2004. The concession Area A, in which Sasol holds 90% operated interest, covers around 8370 square kilometers onshore. Mozambique’s national oil company Empresa Nacional de Hydrocarbonetos (“ENH”) holds the remaining 10% interest in the block.
We believe that the gas exploration and production pact will boost Sasol’s growth prospects in Mozambique by adding to its already significant upstream interest in the country. From a broader perspective, we see the ‘Area A’ deal as part of Sasol’s strategic plan to capitalize on the opportunity to leverage the 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 diverging significantly from oil prices, Sasol is looking to utilize the spread by using its gas-to-liquids (GTL) technology.
Sasol Limited is engaged in the mining and processing of coal. It also produces chemicals, explores and refines crude oil, and manufactures fertilizers and explosives. In addition, it converts coal to petrochemicals products, such as diesel fuels and gasoline.
Sasol ADRs 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 stock.
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