South African energy giant Sasol
For the year ended June 30, Sasol reported that revenue was up 19%, due in part to firm international crude oil prices. Gross margins slipped a bit, no thanks to ubiquitous cost inflation, but the firm realized a very strong return on equity (ROE) of 30%.
Now, it's common for firms to juice their ROE by taking on more debt, but Sasol actually achieved these strong shareholder returns while reducing debt. I'll return to the significance of this balance sheet strength, but first let's take a look at how the individual operating segments performed.
South African energy operations, which hinge on the production of synthetic fuel from coal, contributed 85% of operating profits. I've written about Sasol's international upside in the past, but home operations are clearly the earnings engine for the time being. There were several outages, both planned and unplanned, at the synfuels operation during the quarter, so that hampered volumes all along the line, from mining to refining to fuel sales. Even so, operating profits in the segment rose 17% thanks to strong pricing and a weaker rand (currency).
Tiny intruders have caused some headaches for the international Oryx gas-to-liquids (GTL) project. These small particles, called fines, are being reduced steadily, and once they're winnowed down to an acceptable level, output will ramp up and Oryx will start contributing to profits in the next fiscal year.
Results out of the chemicals group were very strong, particularly in the legally beleaguered paraffin wax business. With operating profits up 128% for the year, Sasol might have a slightly harder time convincing European Union regulators that there's no antitrust activity going on here. No matter -- it's a very small chunk of the honeycomb.
Overall, we're looking at a prodigious cash generator that's investing heavily in new projects while paying down debt, hiking dividends, and executing share repurchases. These activities reveal a terrific financial position, which gives the company a lot of flexibility to pursue high-impact growth opportunities at home and abroad. In my view, Sasol shareholders don't need to wax nostalgic -- the best is yet to come.
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