Oil Prices, Currency Boost Sasol

Sasol Ltd. ( SSL - Analyst Report ) announced strong results for the six months ended December 31, 2011, aided by higher oil prices and a favorable exchange rate, partially offset by lower overall production volumes.

The South Africa-based petrochemicals group reported headline earnings per share, excluding one-time items, of R23.34 (U.S.$2.87), up from R12.98 (U.S.$1.95) earned during the corresponding period last year. Operating profit rose 70% to R20.5 billion.

Segmental Analysis

South African Energy Cluster: Within its South African energy cluster, Sasol Mining's operating income increased 42% to R1.0 billion (after adjusting for the one-off Ixia Coal transaction share-based payment expense), buoyed by increased production volumes and higher U.S. dollar export coal prices. These were further supported by favorable currency fluctuations.

Sasol Gas generated an operating profit of R1.5 billion, up 14.0% year-over-year. The positive comparison can be attributed to higher gas prices and sales volumes, somewhat negated by adverse foreign exchange movements on gas purchases and start-up costs associated with a new compressor in Komatipoort, South Africa.

Sasol Synfuels' operating profit jumped 84% to R9.9 billion, mainly reflecting higher average oil prices that more than made up for lesser production volumes and cost escalation.

Sasol Oil reported an operating profit of R1.1 billion as against R665 million in the prior-year period. The improvement primarily resulted from exchange rate fluctuations and stronger wholesale margins. To some extent, these factors were offset by decreased sales volumes.

International Energy Cluster: Sasol Synfuels International recorded an operating profit of R1.0 billion, up significantly from R539 million earned during the previous half-year period. The improvement was due to stronger performance at the Oryx gas-to-liquids plant in Qatar and higher product prices. These were partly negated by unfavorable currency fluctuations.

Sasol Petroleum International's operating profit fell 64% year-over-year to R121 million, mainly reflecting negative foreign exchange translation effects from overseas operations as well as depreciation of the company’s recently acquired Canadian assets. To some extent, these factors were offset by higher energy prices and increased production from Sasol’s Gabon and Canada operations.

Chemical Cluster: Sasol Polymers reported an operating profit of R546 million, as against R574 million in the prior year comparable period. The segment results were adversely affected by decreased domestic output and the margin pressure in international polymer industry, partially offset by better volumes from international operations and foreign exchange translation differences.

Sasol Solvents' operating income was up 153% from the previous year's level to R1.1 billion, driven by stronger product prices and the weakness of the rand against the US dollar, whose effects were partly mitigated by and lower production volumes.

Sasol Olefins & Surfactants reported an operating profit of R1.7 billion, a reasonable improvement over the income of R1.6 billion during the corresponding period of 2010. The positive comparison came on the back of improved margins and foreign exchange impacts.

Operating Cash Flow & Capex

Sasol generated R22.7 billion in operating cash flows, a 50% year-over-year increase, primarily due to higher operating income, somewhat nullified by higher working capital. The world's largest producer of motor fuels from coal spent R14.5 billion in capital expenditures during the period.

Dividend

The company announced an 84% hike in interim dividend to R5.70 per share. The dividend will be paid on April 16 to shareholders of record as on April 13, 2012. The holders of American Depositary Receipts (“ADRs”) will be paid on April 24, 2012.

Outlook

Looking ahead, the Johannesburg-based entity’s management remains confident about its earnings outlook for the remainder of 2012. Sasol said that problems in the Middle East should lead to persistently higher energy prices that will boost the company’s profitability. However, the Rand/U.S. dollar exchange rate remains the single most important factor in shaping Sasol’s results.

The petrochemicals group repeated that in view of the recent restrictions/sanctions against Iran – on which Sasol is heavily dependent for oil imports – it is looking to diversify its crude sourcing. During the earnings release, Sasol also reiterated its continuing focus on cost containment and capital project execution.

Rating & Recommendation

Sasol – that has recently signed two transactions with Canadian energy explorer Talisman Energy Inc ( TLM - Analyst Report ) to enter the North American shale gas market – currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, for the longer-term, we are maintaining our Neutral recommendation on the ADR.