Sasol's two extremes

On Friday just before the market closed Sasol released a trading statement for their 6 months ending 31 December. In the office we agree that the statement is "balanced", with the following statement highlighting the extremes of the results "Excluding the impact of the impairment of our Canadian shale gas assets, EPS is expected to increase by between 44% and 50%." Actual EPS is expected to be between 0 and 6% higher than the previous comparable period.


A background to their purchase of their Canadian shale gas assets, their effective purchase price was R 7.1 billion effective from the start of 2011. The reason for buying the assets was to give greater supply to their upstream Gas to Liquid (GTL) offering. As there is a divergence in the price of oil and the price of gas, so the demand for GLT products will increase. Their long term strategic plan is solid because the price of oil has been going up and the price of gas has been going mostly sideways since 2010. What I don't think Sasol expected though was the increase in the supply of Canadian natural gas. Since they bought the Canadian assets the amount of Natural Gas produced on a daily basis has doubled, which means they would not have had a problem in obtaining supply for their downstream GTL plants. Only 20% of Canada's natural gas reserves with current technology can be extracted so there should be ample supply going forward to keep prices down.


Due to the Talisman's (the guys who own the other 50% of the Canadian asset) announcement that they are selling their stake in the asset, Sasol did an evaluation of the assets value and decided to impair the assets value by R5.3 billion. Meaning that the impairment cost is 75% of what they paid for the asset 3 years ago, the high Rand value is partly due to the weaker local currency (against the Canadian Dollar), but it still means that they greatly over paid for the asset.


On the bright side, due to the weak rand, Sasol have been printing cash and the excesses generated from that has compensated for the asset impairment. Also going forward, there are two things that are in Sasol's favour. The first is that they still have the asset which will supply their Canadian GLT plant in the future when they build it, owning the supply of the gas means that they will be hedged against the price fluctuations of gas.


Another impairment cost that hasn't come through yet is from the sale of their Sasol Solvents Germany GmbH assets, which will be an impairment cost of R 466 million, but compared to the R5.3 billion written off this period it is fairly small. I don't see the rand strengthening too much over the next six months which would mean the increased earnings generated from the weaker Rand will continue and Sasol could increase their EPS in the next half by the 44 to 50% that could have been in this half.


Sasol is still one of our favourite stocks and as oil prices rise and people become more concerned about the environment (GTL is cleaner than oil based fuels), their GTL products will become more valuable.