Sasol Retains Neutral Rating - Analyst Blog
01 September 2011 - 1:46AM
Zacks
We have retained our Neutral recommendation on South African
petrochemicals group Sasol Ltd. (SSL).
Incorporated in 1979, Sasol is an integrated energy and
chemicals company. It is the leading provider of liquid fuels in
South Africa and a major international producer of chemicals.
Sasol is fairly unique compared to other international oil
companies as it has limited conventional exploration and production
operations and uses a proprietary technology (Fischer-Tropsch) to
manufacture synthetic fuels (synfuels) and chemicals from low-grade
coal and natural gas. Sasol manufactures more than 200 fuel and
chemical products that are sold worldwide.
We like Sasol for its diverse portfolio of assets that produce a
wide array of chemical and liquid fuels. The company specializes in
gas-to-liquids (GTL) and coal-to-liquids (CTL) technologies, which
convert natural gas and coal to diesel and other liquid fuels.
Recently, these technologies have been attracting attention because
they provide an alternative to traditional oil.
With gas prices remaining at depressed levels and thereby
diverging significantly from oil prices, Sasol – through its
upstream North American shale gas investments – is looking to
utilize the spread by using its GTL technology. This is expected to
be more profitable than the company’s traditional business of
producing motor fuels from coal.
In this regard, the Johannesburg-based entity has recently
signed two transactions with Canadian energy explorer
Talisman Energy Inc (TLM) to
enter the North American shale gas market.
Additionally, Sasol’s deleveraged balance sheet and strong cash
position keep the group well-equipped to weather the global
economic storm and fund its growth program in tough credit
markets.
However, we remain concerned by the group’s unfavorable
operating environment – characterized by a strong domestic currency
and weaker refining margins – and its expensive growth
strategy.
Given Sasol's strong balance sheet and net cash positive status,
the company can pursue an aggressive CTL and GTL growth program.
However, we believe this will stretch Sasol’s medium-term returns
significantly, as the company would have to deploy a considerable
amount of capital in gestation until the project starts, which is
not expected before 2015.
As of now, we don't see any obvious catalyst in its business
that would significantly push the stock price higher. Consequently,
we see Sasol ADRs performing in line with the broader market.
SASOL LTD -ADR (SSL): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
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