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Wednesday, September 10, 2008

Sasol seeks coal, gas resources

Sasol seeks coal, gas resources
Marc Ashton
Posted: Mon, 08 Sep 2008

Pat Davies, CEO, Sasol
[] -- SASOL, South Africa’s R249bn petrochemicals company, may buy natural resources, including coal fields, but ruled out merger and acquisition activity.

“We are not contemplating any merger and acquisition activity at the moment” said CEO Pat Davies when asked about plans for the group’s cash pile.

Greater value would be extracted from Sasol’s own investments such as the proposed Mafutha project (a green-fields coal to liquids fuel plant), the Arya Sasol Polymers project in Iran and Sasol Oryx (a gas to liquids plant in Qatar).
put our hands on more and more resources
Davies believes that shareholders will receive better value for money by allowing the company to further invest in infrastructure projects rather than returning value in the form of dividends and share buybacks.

One of the key projects Project Mafutha is a “green-fields” coal to liquids (CTL) plant aiming to produce 80,000 barrels per day of liquid fuel, something the South African government is keen to see come into production to ease its dependence on crude purchases.

The project, which could also exploit coal bed methane, is currently in the ‘pre-feasibility’ phase and Sasol has confirmed that the site will be situated in the Limpopo region where Sasol has started interacting with the community in the region to educate them around the proposed project.

While not disclosing specific allocations per project, Sasol has committed R70bn toward capital expenditure projects across group operations to the end of 2011. These funds will be used for a variety of operations including the ramping up of the Sasol Oryx, Turbo and Octene 3 operations.

Benny Mokaba, executive director of Sasol has been charged with managing the Mafutha project. Mokaba said Sasol was looking at providing a carbon capture environment for all emissions and was considering utilising coal bed methane as a potential revenue stream.

Sasol would opportunistically consider buying resource fields. These could take the form of oil field projects, coal mines and gas deposits, Davies said.

“We want to put our hands on more and more resources and grow our reserves around the world,” he said.

Sasol has recently been involved in a number of transactions for oil and gas resources in Papua New Guinea, Mozambique and Australia.

A rampant oil price and an insatiable demand for chemicals has been a major contributor to Sasol reporting an operating profit of just under R34bn for the year ended June.

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Shareholders have been rewarded with a 58% dividend increase and the prospect of more share buy-backs has been raised.

However Sasol said shareholders will be best rewarded by further investment in capital projects that will expand the retail and commercial footprint of the company across the world.

Sasol has earmarked R70bn in capital expenditure over the next three years for projects around the world.

Chemical sector Analysts had previously questioned whether or not Sasol’s decision to pursue a joint chemicals and oils business was feasible.

The group invested in a number of “downstream” processing chemicals operations in industries such as wax, polymers and base chemicals. This year the investment in the chemicals sector paid off for Sasol.

The chemicals operations reported a 54% increase in contribution to group profitability. This equated to R6.6bn of profitability and was on the back of improved profit margins and strong global demand.

Profit margins in the chemical sector increased from 7% to 9%.

Christine Ramon, Sasol’s chief financial officer, said that the chemicals sector had in the short term appeared to reach the peak of its demand cycle.

Davies did confirm that share buybacks were an option for Sasol to consider as a way to reward shareholders. However he would not disclose whether or not he felt the share was fully priced at the moment.

“We always believe our share is cheap” he said highlighting the confidence in the inherent technology of the business.

Input sensitivity

Ramon cited sensitivity to input costs such as the oil price and rand/dollar exchange rate as a reason for some prudent cash flow management.

Ramon said that Sasol’s earning was affected by nearly R400m for every US$1 movement in the oil price. A 10c change in the Rand Dollar exchange rate affects earnings by around R830m.

Sasol was last trading at R383.60, a 3% increase on the day.

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