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Sasol's Energy Production Remains Under Pressure

By Dan Caplinger – Nov 14, 2016 at 9:44AM

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Energy's recovery hasn't led to huge gains in sales volumes throughout most of the company.

Like most of its peers in the energy industry, South African oil and gas and chemicals company Sasol (SSL -0.55%) has felt the pain from falling prices that haven't managed to bounce back very far from their worst levels of the past couple of years. The oil market's recent push above $50 per barrel proved short-lived, and coming into its quarterly release of production and sales metrics for the third quarter, Sasol hadn't seen much in its stock's movements to indicate that investors were particularly optimistic about its near-term prospects. Indeed, much of Sasol's report showed continued slow conditions in the industry.

Let's look more closely at the latest data from Sasol and what investors should expect from the company in the near future.

Image source: Sasol.

Sasol sees sluggish energy production and sales

Sasol's sales and production data showed many of the same trends that we've seen in past quarters. Although various divisions saw different conditions and therefore reported disparate results, the overall mood of the company still reflects the difficult industry environment that Sasol is operating in right now.

As we saw last quarter in the company's full-year results, Sasol's exploration and production unit continued to see poor results in the North American market. The company reported Canadian natural gas sales of 4.2 billion cubic feet, down more than 10% from last year's first quarter and accelerating from the pace of declines Sasol had experienced in the recent past. Sales of condensates got cut nearly in half to 21,100 barrels. That's consistent with the conditions that Sasol has cited in earlier reports, with particular weakness in North America spurring production decisions that are consistent with the unfavorable price environment.

In Africa, things look a bit different. The company's 70% share of production projects in Mozambique produced better results than a year ago, including a 5% rise in natural gas and a gain of more than a fifth in condensate production. However, crude oil production from Sasol's Gabon project fell sharply, with declines of almost 20% to 328,000 barrels.

The rest of Sasol's energy and mining business also produced mixed results. Coal production was down more than a million tons to 8.2 million tons, and refined synfuel production fell by about 4% to 7.7 million barrels. Sales of liquid fuels were up about 2% from year-ago levels, but sales of both traditional natural gas and methane-rich gas were down incrementally compared to the third quarter of 2015. Production levels at the company's Natref, Oryx, and Escravos facilities were all done from year-ago levels, with production at Escravos disappearing entirely.

What's happening with Sasol's chemicals business?

The state of Sasol's chemical businesses was somewhat more favorable than the energy side of the company. Base chemical sales volumes were up from year-ago levels, climbing more than 8%. The largest gains were in sales of polymers and solvents, which managed to outweigh declines in fertilizer sales. The problem for Sasol, however, is that pricing for its base chemicals products was once again poor, with the company's standard basket price for base chemicals falling by 7% to $800 per ton. Even so, the resulting rise of roughly 1% in dollar revenue from the unit was an encouraging turnaround from past declines.

Sasol's performance chemicals unit also produced positive results. In local currency terms, overall revenue was up more than 3% to 17.5 billion South African rand, led by rising sales of organics. Poor performance in the waxes market held back Sasol's growth, but the company managed to get most of its growth from more favorable pricing overall. Sales volume climbed 1%, again with organics leading the way.

Looking forward, Sasol is still suffering from the fact that its key energy markets aren't performing the way that it would like to see. In order to recover fully, Sasol really needs to see more clarity in global natural gas markets, especially in North America. Moreover, with higher competition coming in the chemicals business, Sasol will have to find strategic initiatives to sustain and improve its position in the industry going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sasol. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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