Having preannounced an earnings collapse back in June, South African energy dynamo Sasol (NYSE:SSL) was unable to surprise the market with its ugly fiscal 2009 results. That said, management offered notable updates aplenty, including a fiscal 2010 forecast that may eventually sap enthusiasm for the shares.
Starting with a positive angle on results, 2009 earnings declined by 39% -- slightly better than management's previous estimate of a 40% - 50% rout. Although there were pockets of strength, broad weakness in the company's oil and chemical end markets drove the earnings decline.
Also, fines related to the company's anti-competition practices, along with other one-time items, weighed on operating profit. The good news? Without those items, operating profit was flat. Moreover, operating cash flow leapt 39%, on the strength of a more conservative working capital position.
Sasol's numerous operating divisions and projects make it the octopus of the integrated oil industry, so let's start with the big picture. Capital expenditures for the next two years have been reduced by roughly 35%, which looks like a prudent move in this macro environment. Smaller projects will feel the brunt of that cut, and management asserts that long-term growth objectives will not be sacrificed.
Among the highlights of projects in the works, the China CTL plant study is moving along according to schedule. The South African Synfuels expansion is targeting a 3% production boost by 2012, along with a one-third jump in energy efficiency. As for existing operations, shareholders can cheer progress at the Oryx GTL plant in Qatar, where average daily production more than doubled year over year. That production boost is particularly noteworthy since Sasol reduced its financial interest in a Nigerian GTL joint venture with Chevron (NYSE:CVX).
For a more sobering view, note that management reduced the company's dividend. That's a smart move from a cash-conservation perspective -- but investors seeking income from their energy holdings will do far better with integrated majors BP (NYSE:BP) or Total SA (NYSE:TOT). Furthermore, favorable currency movements backstopped Sasol's financial performance; while that's good news, investors shouldn’t count on more of the same in the future. Finally, management sees fiscal 2010 earnings coming in below 2009 levels, reflecting lower chemical product demand and a stronger rand/dollar exchange rate, among other factors.
The dim near-term outlook reinforces my belief that Sasol is best considered an ultra-long-term investment. Unlike E&Ps such as Range Resources (NYSE:RRC), EOG Resources (NYSE:EOG), and Apache (NYSE:APA) -- which could see a reversal of fortune simply on an uptick in natural gas prices -- Sasol's prospects are wedded to a range of economic and commodity market factors.
Still thinking of jumping in? Well, the 7.1 P/E on Sasol shares is far below the double-digit levels consistently seen in the 2004 - 2008 stretch, but above the 5.5 - 6.5 range shares occasionally touched earlier in the decade. In other words, if you're going to buy at today's prices, make sure there's nothing synthetic about your long-term approach.
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