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Sasol (NYSE: SSL) is a multinational gas and oil company based in South Africa that produces a wide array of chemical and liquid fuels. ^[1] Sasol specializes in gas-to-liquid (GTL) and coal-to-liquid (CTL) technologies, which convert natural gas and coal to diesel and other liquid fuels. ^{[2] [3]} CTL and GTL technology have been attracting attention recently because they provide an alternative to traditional oil extraction and have the potential to give countries with little petroleum resources the opportunity to generate fuel.

Originally South Africa's state energy company,^[4] Sasol dominates the South African energy industry accounting for roughly 35% of South Africa’s liquid fuel needs and producing over 4% of the country’s GDP.^{[5] [6]} However, Sasol is also growing globally to meet increasing demand for its CTL and GTL services. In fact, Sasol is the world's largest producer of motor fuels from coal.^[7] The company has constructed a GTL facility in Qatar and is constructing another facility in Nigeria. ^[3] Sasol’s earnings are sensitive to the price of oil because its fuel production processes are more expensive than traditional extraction. In addition, while CTL and GTL technologies are alternative methods of producing fuel, they also emit pollution and greenhouse gases. Still, with worldwide demand for energy at consistently high levels, fed by developing nations, and demand for CTL/GTL technology increasing, Sasol is in prime position to lead a new trend in the global energy market.

Falling oil prices in 2008 led to significantly lower profit margins for fiscal year 2009. A strong rand also had a negative impact on the company's performance in 2009.^[8] However, Sasol has entered into some contracts that fix the price of oil, which partially shields its earnings from fluctuations in crude oil prices.^[9]

Business Overview

Business and Financial Metrics

Sasol mines coal in South Africa, converts coal and natural gas into synthetic fuels using Fischer-Tropsch technology, and manufactures chemicals for industrial applications. In South Africa, Sasol refines imported crude oil and liquid fuel products through a network of 406 retail convenience centers.^[10] Sasol also supplies fuels to oil distributors and gas to industrial customers in South Africa and other countries in sub-Saharan Africa. Sasol operates in South Africa, Europe, the United States, the Middle East, and Asia.

Fiscal Year 2009 Performance
Sasol's earnings per share declined by between 37% and 42% during the 2009 fiscal year, mainly due to falling crude oil prices and the impact of a stronger rand on assets and liabilities.^[7] In March, Sasol posted a 44% rise in its half-year net profit to 13.2 billion rand and a 50% jump in revenue to 83.12 billion rand.^[7] However, earnings for the year fell due to lower crude oil prices and falling demand for oil. Since Sasol is a producer of oil from coal, a drop in the price of crude oil affects Sasol's profit margins and a fall in oil demand corresponds to a decline in revenue.

Since nearly 79% of Sasol's operating profit is generated in South Africa, Sasol's profitability depends on the demand for petrol in South Africa.^[11] After surging in 2007, the South African economy plummeted into recession in 2008 and 2009 due to the global financial crisis.^[11] Declines in car sales and decreases in the demand for gasoline from vehicles caused petrol demand to contract by 2.5%.^[11] The demand for middle distillates, used in the industrial sectors and in power generation, fell by more than 5%.^[11] The softening of the South African economy caused the steep decline in Sasol's earnings in 2009.^[11]

Note: Sasol's fiscal year runs from July to June. Currency conversions are based on the exchange rate reported by the Federal Reserve Bank of New York for the last month of the fiscal year.

Geographic distribution of Sasol's operating profit in 2008^[15]

In 2008, Sasol's operating profit increased 53% to 21.5 billion rand over the previous year.^[16] The operating profit was buoyed by higher average crude oil prices (averaging $84.75 USD per barrel in 2008 compared to $81.83 USD barrel in 2007) and chemical product prices, and a 28% weakening in the average rand/US dollar exchange rate (R8.88/USD in 2008 compared to R6.94/USD in 2007).^[16] Cash of R30.8 billion generated by operating activities represents a 118% increase over the prior year comparable period.^[16] Sasol was partially protected from declines in oil prices in mid-2008 by oil hedges.^[16] However, the tough economic climate has forced the company to reduce its capital expenditure forecast for the next three years (2009-2011) by approximately 40%.^[16]

SSL Net Income and Revenue from 2005 to 2008 in millions of ZAR (South African Rand)^[17]

Expansion Strategy and Capital Investments

Despite the economic downturn, Sasol has pursued an aggressive expansion strategy, both in South Africa and abroad. Sasol, for example, entered into a joint venture with Uzbekneftegaz (the National Oil and Gas Company of Uzbekistan) and PETRONAS from Malaysia for the development and implementation of a Gas to Liquids (GTL) project in Uzbekistan in July 2009. The GTL facility will produce approximately 1.3 million tons of GTL Diesel, GTL Kerosene, GTL Naphtha and Liquefied Petroleum Gas (LPG).^[18] Within South Africa, Sasol established a world-class fuel testing facility in June 2009 for 70 million rand. The facility, which will facilitate state-of-the-art fuels research and development, is the company's biggest intervention to test the impact of its range of synthetic and crude oil derived fuels on vehicle emission and performance. ^[9] Finally, Sasol contributes to local South African universities to ensure that the sustainability of Sasol's human resource model. Sasol, for example, committed to investing 250 million rand with South African universities over a 10 year period.^[9]

Additionally, in November 2009, Sasol announced that it had signed a memorandum of understanding with Norway’s Gassnova to allow Sasol to explore participating in a carbon dioxide technology center in Norway.^[19] The test facilities are planned to capture 100,000 tons of carbon dioxide per year.^[19] Sasol has pledged to reduce its carbon dioxide emissions by 15 percent by 2020, and its involvement in the Norwegian carbon dioxide technology center will help it reduce its emissions via clean coal.^[19]

Sasol is also aggressively seeking opportunities to expand in emerging markets. In January 2010, Sasol announced that it would partner with Tata Steel in India to set up the country's first CTL plant. Sasol plans to open the plant for production in 2018, with a target production of 80,000 barrels of liquid fuel per day.^[20]

Business Segments

Synfuels

Sasol's signature business, and its most profitable segment, is the manufacture of synfuels—converting coal and gas to refined transportation liquids. The company operates the world's only commercial coal-based manufacturing facility at its Secunda plant in South Africa.^[21] The Synfuels division produces liquid fuel, ammonia, chemical feedstock, sulfur, electricity, and steam.

While to date Sasol has focused on domestic markets, it has recently undertaken a number of international initiatives through the Sasol Synfuels International division. In 2007, Sasol built its first international GTL plant in Qatar in partnership with Qatar Petroleum. ^[21] The company has also partnered with Chevron to develop other international ventures, including a CTL/GTL plant in Nigeria. ^[21] Sasol is in talks for GTL projects in Algeria, Iran, Australia, and a CTL facility in China. Also, in April 2008, Sasol announced a partnership with Uzbekneftgaz, the national oil and gas company of Uzbekistan, to develop and implement a GTL project in Uzbekistan.^[22]

Chemicals

Sasol’s Chemical division manufactures polymers, solvents, olefins, surfactants, and other chemicals. Sasol Chemicals has operations in South Africa, the US, Germany, Italy, Malaysia, China, and other locations across the globe. ^[23] The company opened its Octene 3 plant in South Africa in June 2008, which has the capacity to produce 100,000 tons of 1-Octene per year. In Iran, Sasol has invested 610 million euros in a joint venture with the National Petrochemical Company of Iran to construct a new polymer plant that is designed to produce one million tons of ethylene to be converted into polyethylene.^[24] By the middle of 2009, Sasol expects to produce 356,000 tons of 1-Octene and 1-Hexene, critical components of industrial solvents, per year. ^[24]

2008 Operating Profit by segment ^[25]

Oil and Gas

Although Sasol's business is heavily weighted toward the production of Synfuels, the company also participates in the traditional energy sector as well. Sasol imports some natural gas from Mozambique and produces the rest at its Secunda facility, which is then distributed to customers in South Africa. ^[21] Sasol also sells refined liquid chemicals such as petrol, diesel, jet fuel, paraffin, and lubricants to South Africa and throughout the Southern African Development Community (SADC), an organization of 15 countries in sub-Saharan Africa.^[26] Exel, the company's gasoline subsidiary, operates 183 retail convenience centers and 223 service stations in South Africa.^[21]

A substantial portion of the oil and gas produced by Sasol is used by its Synfuels business. The company has interests in oil and gas production in Mozambique, South Africa, Gabon, Nigeria, Australia, and Papua New Guinea. ^[23] Sasol is pursuing other gas exploration companies to supply its future GTL plants. ^[27]

To hedge against short term volatility in oil prices, Sasol uses a combination of forward exchange contracts and crude oil futures.^[28] However, these contracts do not insulate Sasol from long term trends in global energy prices. ^[28]

Mining

Sasol mines approximately 43 million tons of coal per year, mostly for use in its Secunda and Sasolburg facilities. ^[21] The company exports approximately 3 million tons of coal annually. ^[21]

Trends and Forces

Global Oil and Energy Markets

Sasol’s future is fundamentally tied to developments in the broader oil and energy markets. Sasol adds value through its CTL and GTL technologies by introducing a new way to produce diesel and other transportation fuel without oil reserves. Internationally, countries are looking to CTL/GTL technology as the future of the energy sector. For example, China, Iran, Nigeria, and Qatar have taken leading positions in developing CTL/GTL facilities. ^{[29] [30] [31]} Sasol already has projects or talks underway in each of these countries. ^[30] In addition to developing countries, developed nations have expressed interest in GTL/CTL because it has the potential to break their reliance on unstable and unfriendly regimes for oil. For example, California and Montana have adopted GTL/CTL within their long term energy strategies. ^[29]

In 2008, falling oil prices made coal-to-liquid and gas-to-liquid technologies less economically attractive, and the credit crunch derailed plans to build the first large coal-to-liquid plants in the United States in 2008.^[32] However, rising oil prices in 2009 have again made coil-to-liquid technology more economically attractive. The rate of adoption of coil-to-liquid technology is directly tied to the price of oil.

In China, the government issued a moratorium on new coal-to-liquid facilities, but allowed the Shenhua Group to build an Inner Mongolia plant (in a partnership with Sasol) which started operations in December 2008.^[32] Shenhua Group also has plans to build a second plant by 2013.^[32] China’s new plant shows that countries rich in coal but poor in oil are likely to play to their strengths as they seek to meet rising demand for energy, especially liquid transport fuels.^[32]

Sasol is subject to fines for violation of competition law

In May 2009, Sasol was fined R250.7 million after the European Union's Competition Commission uncovered anti-competitive behavior within Sasol's Nitro division.^[33] In order to end an ongoing investigation started in 2002 into cartel conduct in its chemicals business, Sasol submitted details of its collusive behavior to the commission.^[33] The commission reported that Sasol Nitro, Omnia and Yara (formerly Kynoch), three players in the phosphoric acid and fertilizer market, engaged in collusive behavior by fixing prices.^[33]

Sasol also was fined in 2008 for collusion in its European wax business. It is now appealing against a R3.7 billion fine - the largest fine ever imposed on a South African company - for its role in a cartel in Europe's wax market.^[33] The companies in the wax cartel comprised Sasol, Shell in the UK and Netherlands, Spain's Repsol, ExxonMobil, Italy's ENI, German Tudapetrol, Hansen & Rosenthal, Hungary's MOL, German RWE and France's Total.^[34] Regulators found that the companies conspired to fix prices and share markets for the sale of paraffin wax. The companies accounted for 75% of the European paraffin wax market.^[34]

Currency Forces

Sasol’s success is influenced by the strength of South Africa's currency, the rand, versus the dollar. The majority of Sasol’s costs are based in rand (in SA) or euros (in Europe).^[35] In contrast, the majority of the company's revenues are dollar-based since petroleum and chemical products are predominantly quotes in US dollars.^[35] This means that a declining rand/dollar exchange rate favors Sasol’s earnings. Rand to dollar exchange rate remained relatively low throughout 2007, providing a lift for Sasol’s profits. ^[14] During 2009, the average rand/US dollar exchange rate weakened by 24%, resulting in decreased operating profits, but the rand/US dollar exchange rate returned to the same levels as the end of 2008 by the end of 2009.

To protect against exchange rate volatility, Sasol hedges any foreign currency denominated transaction in excess of US $50,000 with forward exchange contracts. ^[28] The company estimates a 10 South African cents decrease in the annual average rand/US dollar exchange rate would increase operating profit by approximately R832 million in 2009. ^[28]

An increase in the rand/U.S. dollar exchange rate in 2009 contributed to a decrease in operating profits^[36]

Domestic South African Issues

Despite the stability of South Africa compared to some of its neighbors, Sasol is still subject to the challenges inherent in emerging markets. In 1994, South Africa's government changed from white-rule to a broader democracy.^[37] The change in government was accompanied by financial and legal engineering that aimed to uplift previously disadvantaged groups, a move that became known as BEE (Black Economic Empowerment).^[37] Since 1998 every company in South Africa has had to deliver targeted BEE levels in employment, training, community support and equity participation.^[37] Supporters of BEE policies say it is helping the country achieve full economic potential in addition to correcting historical wrongs, while opponents claim BEE constrains growth. ^[38]

In South Africa, economic inequality has resulted in calls for raising taxes on corporations and wealthy individuals. In 2007, a South African National Treasury panel pushed to institute a windfall tax on the synthetic fuel industry, but the government ultimately decided against it to stimulate foreign investment. ^[39] In 2008, after five years of controversial national debate, ^[40] the Mining and Petroleum Resources Royalty bill was approved by the South African Parliament. Effective May 1, 2009, mine operators and liquid fuel extractors will have to pay profit-based royalties to the government.^[41] The royalties favor startup mines and mines close to the end of their lifespans, which are low-margin, and have the potential to hurt Sasol's South African mining operations, which are comparatively profitable. ^[41]

Climate Change Regulation

Sasol is the second largest emitter of carbon in South Africa.^[42] The company's total greenhouse gas emissions have risen to 72.7 million tons in fiscal year 2008 from 69.8 million tons in 2007.^[42] Sasol Oil and Petroleum must already abide by stringent environmental regulations that mandate the installation of expensive conversion units.^[43] A series of international meetings took place, culminating in the Copenhagen conference held in late 2009 with the goal of establishing a global climate change agreement to reduce greenhouse gas emissions.^[44]

For certain projects, Sasol must receive approval from environmental regulatory authorities. For example, Sasol's Secunda natural gas pipeline was delayed when the United Nations Framework Convention on Climate Change methodologies panel rejected the project. Sasol received 254,346 carbon credits in 2008 when its nitrous oxide emissions abatement projects in Sasolburg and Secunda were registered as clean development projects.^[45]

Sasol's unique CTL and GTL fuel production technologies put the company in a prime position as the search for alternative energy continues. ^[46] However, Sasol's process in converting coal into diesel gasoline produces a significant amount of pollution and greenhouse gas emissions. ^[47] In order to ensure the sustainability of its business, Sasol also is developing alternative energy programs the utilize various technologies: carbon capture and storage, solar, wind, biomass, hydro-electricity and energy efficiency improvement.

Competitors

Sasol dominates the South African energy industry and does not face any significant local competition. In fact, it accounts for roughly 35% of South Africa’s liquid fuel needs and produces over 4% of the country’s GDP.^{[48] [49]}

Internationally, Sasol is a world leader in coal-to-liquid technology, a niche market within the energy sector. Sasol hopes to expand its global business segments, particularly Sasol Petroleum International (SPI). ^[27] As a result, the company will face increasing competition from larger international energy companies.

References

1. ↑ Global Markets Direct report, Nov 2008, page 9
2. ↑ GTL and CTL Commercialization
3. ↑ ^{3.0 3.1} SSL 2008 20F, Item 3 "Key Information," page 15
4. ↑ SSL 2008 20F, Item 4 "Information on the Company," page 29
5. ↑ SAinfo, "Sasol to expand Secunda plant," 22 Oct 2007
6. ↑ Slate
7. ↑ ^{7.0 7.1 7.2} Sasol FY EPS Fell By Up To 42%, Less Than Previously Forecast
8. ↑
9. ↑ ^{9.0 9.1 9.2} Bloomberg: Petronas, Sasol Sign Agreement for Fuels Plant in Uzbekistan
10. ↑ Reuters: Sasol Ltd
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} Sasol Annual Review 2009, p. 5
12. ↑ ^{12.0 12.1} Google Finance SSL
13. ↑ Reuters Sasol Ltd
14. ↑ ^{14.0 14.1 14.2} Federal Reserve Board of Governors, "South African Rand to One US Dollar Exchange Rate"
15. ↑ Sasol Annual Review 2008
16. ↑ ^{16.0 16.1 16.2 16.3 16.4} Sasol Investor Centre: Financial Performance 2009, 12 March 2009
17. ↑ Google Finance: SSL Income Statement
18. ↑ OilVoice
19. ↑ ^{19.0 19.1 19.2} CleanTech: S. Africa’s Sasol eyes potential of CO2 tech project in Norway
20. ↑ [http://www.business-standard.com/india/news/tata-steel-sasol-to-setctl-plant-in-orissa/83443/on Business Standard: "Tata Steel-Sasol to set up CTL plant in Orissa"
21. ↑ ^{21.0 21.1 21.2 21.3 21.4 21.5 21.6} SSL 2008 20-F, Item 4 "Information on the Company," page 37
22. ↑ Sasol Investor Relations: "SASOL SIGNS HEADS OF AGREEMENT AND MEMORANDUM OF UNDERSTANDING IN UZBEKISTAN" 8 April 2009
23. ↑ ^{23.0 23.1} SSL 2008 20-F, Item 4 "Information on the Company," page 38
24. ↑ ^{24.0 24.1} SSL 2008 20-F, Item 4 "Information on the Company," page 42
25. ↑ SSL 2008 20-F, Item 5 "Operating and Financial Review," page 153
26. ↑ SADC Profile
27. ↑ ^{27.0 27.1} SSL 2008 20-F, Notes to Financial Statements, page F30
28. ↑ ^{28.0 28.1 28.2 28.3} Sasol Annual Financial Statement 2008, CFO's Review
29. ↑ ^{29.0 29.1} American Institute of Chemical Engineers, "GTL and CTL Commercialization: Status and Impact on Global and Regional Product Markets"
30. ↑ ^{30.0 30.1} SSL 2008 20F, Item 4 "Information on the Company," page 32
31. ↑ SSL 2008 20F, Item 4 "Information on the Company," page 105
32. ↑ ^{32.0 32.1 32.2 32.3} The Great Beyond: China joins exclusive coal-to-liquid club - January 07, 2009
33. ↑ ^{33.0 33.1 33.2 33.3} All Africa: Sasol's Antitrust Fine Tops R250 Million
34. ↑ ^{34.0 34.1} African Business: "Sasol Hit with Huge Anti-Competition Fine"
35. ↑ ^{35.0 35.1} SSL 2008 20F, Item 4 "Information on the Company," page 12
36. ↑ Sasol 2009 Annual Report, p. 7
37. ↑ ^{37.0 37.1 37.2} Moneyweb, "The politics of profits"
38. ↑ SAinfo, "Black economic empowerment"
39. ↑ BuaNews, "No windfall tax on fuel industry," 7 Aug 2007
40. ↑ Sabinet Legislative Information
41. ↑ ^{41.0 41.1} IP Finance, "South Africa's controversial Mineral and Petroleum Resources Royalty bill"
42. ↑ ^{42.0 42.1} Business Day, "Sasol pursues plan for coal-to-liquid plant"
43. ↑ Global Markets Direct analyst report, SSL "Industry Outlook," page 11
44. ↑ Copenhagen 2009, “The Government’s Goals for COP15”
45. ↑ SA Companies Slow to Earn Carbon Credits
46. ↑ Global Markets Direct analyst report, SSL "Facing the complex challenges of clean energy," page 27
47. ↑ Seeking Alpha, "Sasol and the Liquid Coal Revolution"
48. ↑ SAinfo, "Sasol to expand Secunda plant," 22 Oct 2007
49. ↑ Slate
50. ↑ Google Finance SU
51. ↑ Google Finance BTU
52. ↑ Google Finance CNX
53. ↑ Google Finance CVX
54. ↑ Google Finance BP