Sasol newsletter to shareholders

Every six months Sasol come out with a newsletter written by CFO Christine Ramon which provides key updates on company events which includes major capital projects and forward looking predictions. It's a great way to get a feel for the company, what they are about and where they are headed. I think more companies should do this type of thing, at the end of the day the more informed you are about a company the more comfortable you will feel about investing in them. Let's take a look at what she says and try summarise it somewhat but if you are interested in reading the whole thing, here is the link.

She starts off by looking at the financial position of the company which is in good shape following cost management and enhancing operational efficiencies. Obviously Sasol are heavily influenced by currency and commodity fluctuations. A stronger rand is not good because it decreases the cost of oil for our government and therefore the price that Sasol can sell their petrol. In fact every 10c gain costs Sasol R550m. But at the same time an increase in the oil price is fantastic for Sasol. We all know what the oil price has been doing this year. Overall the increase in the oil price has trumped the increase in the rand resulting in an overall increase of 27% in fuel prices. She also reiterates progressive dividend policy, great for shareholders.

Sasol are bullish on the oil price in the long run. We agree. Unkown unknowns like the unrest in the Middle East are going to happen but in the long run the fundamentals will sustain the price above $100. As far as the Rand is concerned, well it will probably remain strong for as long as interest rates in developed markets remain low. By the looks of things, this is going to be the case for the next few years.

Things in their chemical business also look bullish as demand for polymer (plastics) should start overtaking the supply capacity assuming there is no double dip. We do not believe there will be a double dip so such a convergence should be good for margins. Now the part I am interested in, their Synfules division. Capacity utilisation has improved from last year having produced 1.9 million tons of saleable product for the latest quarter. Last year the figure was 1.8mt. For the year so far they have produced 5.3mt compared to 5.5mt last year but remember the large maintenance shutdown they had to do in the first half of the year. Looking at these figures you would expect full year production to be pretty similar to last year. So add the 27% increase in fuel prices to a similar production number and, yes you guessed it, a 27% increase in revenue!

Their GTL division is improving production performance with most of the focus on their Oryx operation. It is their first and only fully operational GTL project so its success is vital for the future of their GTL business. Daily production averaged 25 600 barrels per day but in the month of May they managed 32 000 bbl/d, 99% of capacity. Hopefully they can keep that up.

She mentions their acquisitions in Canada which I spoke about on Monday so I will not cover that again but it involves their GTL expansion. These projects will take time, years. But we are patient and invest for the future. On that topic the Uzbekistan GTL joint venture is nearing the end of its feasibility study so hopefully we will get a decision soon on that one. This has been going since December 2009.

Obviously the environment got a mention. They are happy to cooperate with the South African government in their reduction of Greenhouse Gas Emission objectives. Sasol have an extremely strong position in the eyes of the government. They provide our country with fuel we should not actually have. In fact they save the South African government R40bn a year in foreign exchange. This means that a balance needs to be found between the environment and developmental needs of our country. Christine Ramon says that Sasol are more than willing to integrate their policies with governments, hence the push for GTL.

It's amazing how little she actually talks about Coal to Liquids (CTL) only mentioning the progress of the Indian project. Don't get me wrong, CTL is an integral part of their business and the volumes are much better than the GTL projects. It is also vital that the current CTL projects remain in operation. It just does not seem a big part of their future growth anymore.

All in all a very informative report. The stock already reflects the increase in earnings we expect from the fuel price. That's because its daily moves literally follows this indicator. Looking forward however we should expect fantastic future growth as the oil price remains strong and Sasol increase their capacity.