Sasol business update

This morning Sasol released a very long and detailed update for the 9 months ended 31 March. Here it is if you would like to read it otherwise I'll give you a summary. Basically it covered 4 points, 1. Overall macro-economics supports group profitability, 2. Improved operational performance, 3. Financial performance 4. Project updates. Lets look at the highlights and some important points that stand out.

As I said in my piece a few days ago (Sasol, the Rand and the oil price) Sasol earnings are heavily influenced by changes in the rand and the oil price. This release first looks at the macro issues which affect the moves of these prices and then looks at the stuff which Sasol can control, production.

They mention, and this is immediately factored into the share price, that the oil price has improved over the year of operation and that the rand has weakened on average. These variables resulted in a 31% rise in average domestic fuel prices and should boost Sasol's earnings strongly. Other than that concerning macro issues, they talk about issues in Europe and the US, which had a negative impact on the chemicals business.

In terms of production the Synfuels division recovered nicely after some plant incidents which halted production in the first half of the year. They also plan to be 60% self sufficient in terms of electricity generation by next year. That is very exciting and once they become 100% self sufficient it will completely mitigate all electricity hikes that most companies have to deal with. I know I'm stating the obvious but it needs to be repeated.

The Oryx GTL plant continues to break production records as it maintains an 80% utilization rate. This is important to note because the success of this project has big implications for further GTL expansion. On that note the recent shale gas assets they purchased in Canada are under pressure because of low gas prices. This has resulted in a loss for the year to date. At this stage they are just drilling gas but we think the future lies with a GTL plant in that region. In that case cheaper gas is better.

Financially the company is sound. They say it better than I can. "Healthy cash generation for the nine months ended 31 March
2012 reduced group debt after funding significant capital expenditure, allowing the group to maintain a strong balance sheet. Our strong balance sheet supports the funding of our capital growth programme, potential acquisition opportunities as well as our progressive dividend policy whilst providing a buffer against volatility and retaining flexibility in uncertain credit markets where the cost of funding has increased. We continue to focus on strengthening working capital management and monitoring credit exposure and counterparty risks."

All in all things are looking good at Sasol. Last year the company made R33.85 a share. Although there are some losses, with better production and a higher price received in the synfuels division earning will grow. At R345 a share the company looks very cheap and I would expect a very healthy dividend. We will carry on buying into this weakness.