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Sasol Stays Optimistic Despite a Tough Energy Market

By Dan Caplinger - Sep 8, 2015 at 9:45AM

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The South African synfuel specialist is vulnerable to falling oil prices but still sees a good future ahead.


Source: Sasol.

Energy companies around the world have suffered from the drop in the crude-oil market over the past year. Yet not every company in the energy sector is the same, and in particular, South Africa's Sasol (SSL 3.73%) differs from most of its peers because of its emphasis on synthetic fuels. Nevertheless, in looking at its full-year fiscal 2015 results, it's evident that Sasol has seen its profitability suffer even as it continues to produce solid operational results. Let's take a closer look at Sasol and what its full-year results say about its future.

Sasol makes the most of a harsh environment
Sasol's headline numbers showed the same impact that most energy companies have seen across the world. In local currency terms, revenue dropped almost 9% to 185.3 billion South African rand, which works out to around $13.5 billion at current exchange rates. Earnings inched higher to 29.7 billion rand, with operating profits climbing by 2%.

Looking more closely at Sasol's results, a combination of factors led to the company's solid performance. Sasol blamed the drop in Brent crude prices by a third for much of the profit headwinds the company faced, but it also managed to boost sales volumes and keep margins as wide as possible thanks to cost containment strategies. The weakness in the South African rand compared to the U.S. dollar also helped boost Sasol's local-currency-based results, with the rand having fallen about 10% against the dollar on average for the year.

Sasol also pointed to some one-time items that positively affected its results. Falling share prices reduced Sasol's option-exercise expenses during the year, and the energy company also saw the useful life of its operating assets get longer during the year, cutting depreciation and environmental expenses by a total of about 3.2 billion rand. Impairment costs also declined substantially compared to the previous year. Without those impacts, Sasol said that normalized earnings would have plunged 30%.

Operationally, Sasol remains optimistic. The company pointed to success in boosting liquid-fuel sales volumes in the southern part of the African continent, and it has also seen strength in its performance chemicals and base chemicals segments. Sasol's efforts at implementing what it called its business performance enhancement program helped keep fixed cash costs lower, helping to offset falling profit from lower prices. Overall, Sasol said that its response plan conserved nearly 9 billion rand in cash.

Sasol executives were pleased with the company's resiliency. "With a new operating model," CEO David Constable said, "underpinned by streamlined corporate and management structures, simplified governance and decision-making processes, and new ways of working, Sasol is a redefined, resilient, integrated chemicals and energy company." Constable emphasized that Sasol's cost reductions have been instrumental in keeping the company competitive.

Can Sasol stay strong?
Still, investors will have to deal some fallout from Sasol's results. The final gross dividend for Sasol shareholders will be 15% lower than in the prior year, and that could disappoint investors looking for more income.

In addition, Sasol's long-term guidance remains cloudy. The company believes that crude oil will stay between $50 and $60 per barrel over the next year, and it doesn't expect a recovery until the end of 2017. Sasol is hoping for continued strength in chemical sales, and it plans to keep volumes of liquid fuels at healthy rates. Yet cost management will continue playing an active role in Sasol's success, with the hope that the response plan will generate 10 billion to 16 billion in cash flow during the next year.

In general, Sasol investors seemed pleased at the company's ability to keep costs as low as possible. Nevertheless, with so many issues hitting the energy markets right now, it'll be some time before Sasol can have more certainty about its long-term prospects in weathering the crude-oil storm and hopefully emerging stronger than ever.

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