Sasol (NYSE: SSL) is a multinational gas and oil company based in South Africa that produces a wide array of chemical and liquid fuels.  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, and it is the largest producer of motor fuels from coal worldwide.   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, 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.  However, Sasol is also growing globally to meet increasing demand for its CTL and GTL services. The company has constructed a GTL facility in Qatar and is constructing another facility in Nigeria.  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 South African Rand (ZAR) also had a negative impact on the company's performance in 2009. However, Sasol has entered into some contracts that fix the price of oil, which partially shields its earnings from fluctuations in crude oil prices.
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. 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. Sasol obtains nearly 2 billion tons of coal per year from a consortium of national mining companies.
The Sasol conversion process heats a hydrocarbon, either coal or natural gas, into a fuel gas made of hydrogen and carbon monoxide. Using a patented process that involves cobalt catalysts, it converts that gas into a mix of liquids, 80% diesel fuel, 15% naphtha and 5% liquid propane. The finished product has only about 62% as much energy as the raw material. In addition to losing energy, the process creates excess carbon dioxide, compared to burning the natural gas or coal directly for energy. But starting with natural gas, the amount of carbon dioxide released per finished gallon of liquid fuel is comparable to the carbon footprint of a gallon from a traditional refinery.
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. Sasol's net income fell to 6.3 billion rand ($853 million) in the six months through December 2009, from 13.2 billion rand a year earlier. Sasol's profitability fell sharply because the price of crude oil was 19 percent lower in 2009 than a year earlier, and the South African rand strengthened 14 percent against the U.S. dollar, reducing income from foreign sales. 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. After surging in 2007, the South African economy plummeted into recession in 2008 and 2009 due to the global financial crisis. Declines in car sales and decreases in the demand for gasoline from vehicles caused petrol demand to contract by 2.5%. The demand for middle distillates, used in the industrial sectors and in power generation, fell by more than 5%. The softening of the South African economy caused the steep decline in Sasol's earnings in 2009.
|Revenue (billions of rand)||129.9||98.1||82.3||69.2||43.6|
|Net income (billions of rand) ||22.4||17.0||10.4||9.7||5.4|
|Revenue* (billions USD)||16.4||13.7||11.8||10.3||6.8|
|Net income* (billions USD) ||2.8||2.4||1.5||1.4||0.837|
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.
In 2008, Sasol's operating profit increased 53% to 21.5 billion rand over the previous year. 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). Cash of R30.8 billion generated by operating activities represents a 118% increase over the prior year comparable period. Sasol was partially protected from declines in oil prices in mid-2008 by oil hedges. 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%.
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). 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.  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.
Sasol's latest project is building an ethylene purification unit in Sasolburg, South Africa, for 1.9 billion rand. Construction is planned to start in October 2010. The plant is planned to start producing in 2013. The ethylene will be used in the manufacturing of polyethylene for plastics. South Africa currently imports large quantities of plastic, so a polyethylene plant could reduce South Africa's plastic imports.
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. The test facilities are planned to capture 100,000 tons of carbon dioxide per year. 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.
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. Rising incomes in India are driving vehicle sales, boosting fuel demand in the world’s second fastest-growing major economy. India's energy use may more than double by 2030 to the equivalent of 833 million metric tons of oil from 2007, according to the International Energy Agency. The CTL facility will help India establish energy independence.
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. 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.  The company has also partnered with Chevron to develop other international ventures, including a CTL/GTL plant in Nigeria.  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.
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.  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. 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. 
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.  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. Exel, the company's gasoline subsidiary, operates 183 retail convenience centers and 223 service stations in South Africa.
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.  Sasol is pursuing other gas exploration companies to supply its future GTL plants. 
To hedge against short term volatility in oil prices, Sasol uses a combination of forward exchange contracts and crude oil futures. However, these contracts do not insulate Sasol from long term trends in global energy prices. 
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.    Sasol already has projects or talks underway in each of these countries.  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.
With a huge spread between oil and natural gas prices, and predictions of oil reaching $100 a barrel in 2011, Sasol's conversion technology could prove to be highly profitable. Several other companies have tried to make liquid fuels from natural gas or coal. Baard Energy has been planning a coal-to-liquid plant in Ohio, and Peabody Energy (BTU) has discussed a similar plant. Sasol estimates that the natural gas needed for a gallon of diesel, plus operating costs, comes to about $1.50 a gallon. In comparison, a gallon of diesel made from crude oil now costs more than $2, even before refining.
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. Shenhua Group also has plans to build a second plant by 2013. 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.
On December 23, 2010, Sasol announced that it would spend over $1 billion Canadian dollars to buy a half-interest in a Canadian shale gas field in order to explore turning natural gas into diesel and other liquids. Sasol acquired a 50% stake in Farrell Creek shale gas assets, in British Columbia. The other 50% stake is owned by Talisman Energy (TLM).
Sasol is building a similar plant in Nigeria with Chevron, and last month, it completed a feasibility study in Uzbekistan. It also recently submitted a proposal to Shenhau, the Chinese coal company, for a similar plant.
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. 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. 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.
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. 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. 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.
Sasol's financial statements are reported in rand, the currency of South Africa. The chart below shows the rand-U.S. dollar exchange rate. The number on the y-axis represents the number of rand in one U.S. dollar.
Sasol’s success is influenced by the strength of the rand versus the dollar. The majority of Sasol’s costs are based in rand (in SA) or euros (in Europe). In contrast, the majority of the company's revenues are dollar-based since petroleum and chemical products are predominantly quotes in US dollars. 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.  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.  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. 
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. 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). Since 1998 every company in South Africa has had to deliver targeted BEE levels in employment, training, community support and equity participation. 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. 
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.  In 2008, after five years of controversial national debate,  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. 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. 
Sasol is the second largest emitter of carbon in South Africa. 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. Sasol Oil and Petroleum must already abide by stringent environmental regulations that mandate the installation of expensive conversion units. 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.
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.
Sasol's unique CTL and GTL fuel production technologies put the company in a prime position as the search for alternative energy continues.  However, Sasol's process in converting coal into diesel gasoline produces a significant amount of pollution and greenhouse gas emissions.  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.
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. 
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).  As a result, the company will face increasing competition from larger international energy companies.
|Sasol||Suncor Energy (SU)||Peabody Energy (BTU)||CONSOL Energy (CNX)||ChevronTexaco (CVX)||BP (BP)|
|Return on Equity||32.47%||27.40%||17.34%||23.48%||25.60%||23.38%|