Over the past year, the double whammy of higher oil prices and a weaker rand dwarfed all other economic effects on the oil and chemicals sector.
But the industry continued to outperform other sectors, such as industrials and financials, and looks set to become an important area of growth for SA.
Brent crude oil prices averaged US24/barrel last year, compared with 1998's $10/bbl. Prices look set to stay in the mid-20/bbl range. Political turmoil in the Middle East sent oil to a six-month high of $26/bbl. But analysts say 5-6 of this price already reflects a war premium. So oil prices are likely to have peaked (barring worse conflict in the Middle East or another terrorist attack like that of September 11).
Higher energy prices bode well for oil companies such as Sasol and Energy Africa, but not for chemical companies, where oil is a major input cost.
Sasol
Synthetics fuel giant Sasol delivered supercharged interim results this year, boosted by a weak rand. SG analyst Pierre Ranwell says its earnings are three times more sensitive to currency changes than to the oil price.
Despite a softer global economy and falling demand for petrochemicals, the company made strides in efficiency, which helped operating profit grow to R7bn for the half-year to December 2001 (2000: R4,8bn).
The weaker rand helped boost the predominantly dollar-based group sales last year in its main divisions: chemicals, oil, mining and synthetic fuels. But imported raw materials and feedstocks were adversely affected.
Sasol is striving for global competitiveness. Its input costs are falling steadily. In 1996, producing a barrel of oil cost the company $13; it now costs about $10. Investor relations manager Cavan Hill says the company plans to reduce that to $7/bbl over the next six years.
Sasol spent most of last year bedding down its first major international acquisition, German chemical company Condea, now called Sasol Chemie. The new company added R435m to operating profit in the half-year to December 2001. Sasol now generates 57% of total sales from exports and overseas operations . But analysts remain cautious about the chemical operations.
"The global chemicals sector is overcapitalised and highly competitive," says Deutsche Bank analyst Brenton Saunders. "In rand terms, further offshore acquisitions are likely to be huge."
With the launch of Sasol's 1,2bn Mozambican natural gas project, the company looks set to reduce costs further. Using natural gas instead of coal as a feedstock should improve efficiency. "Gas isn't subject to inflationary pressures like coal and is less labour-intensive," says Hill.
Pipeline gas contributes less than 2% to SA's primary energy sources, against the 20% international average, so there is plenty of growth potential.
Borrowings of net cash have risen from less than R1bn a year ago to more than R6,1bn, but analysts are comfortable this won't strain the balance sheet. Hill says gearing should remain between 30% and 40%. Gas-to-liquids projects in Nigeria and Qatar provide the opportunity for further international growth. "These are the first of many projects," says Hill.
Though the company is looking at a secondary listing overseas, Hill says it's unlikely to shift its domicile from SA.
Locally, Sasol hopes to increase its share of the retail petrol market. It produces nearly 40% of SA's fuel and supplies to other oil companies wholesale, but has only 5% of the direct retail market . When its supply agreement ends next year, it aims to capture 10%-15% of this market.
Energy Africa
Also celebrating good results was Energy Africa, a small exploration and production company which prospects for gas and oil in Africa. It certainly kept investors' pulses racing.
New leadership was appointed last year and COO Adrian Nel and MD Rhidwaan Gasant have laid out a growth strategy . The company is sitting on a pot of black gold in Equatorial Guinea - it made five successful finds in offshore fields in the past year.
The six-month period to September 2001 was the most successful in the company's short history. Compared with the same period in 2000, it increased production by 45%, boosting operating profit 91% to $31,8m. In rand terms, operating profit increased 126% to R261m for the six months. The second-half results should be lower, as the company plans a temporary decline in production in Equatorial Guinea and higher exploration activity, and it expects lower oil prices.
Gasant and Nel say they will focus on cash flow, as the company invests heavily in exploration . "We don't believe we should overextend our balance sheet," says Gasant. He says gearing of 50% is considered maximum . Energy Africa needs another $200m in the next 12-18 months for project development. A revolving credit facility of $50m was set up last year. A further $50m will be funded through debt by the end of 2002. The balance may be met through equity.
After the oil finds in Equatorial Guinea, Merrill Lynch increased its NAV estimate from 4,80/share to $5,20.
The Kudu gas field on SA's west coast, too, looks promising, but Energy Africa's stake is just 10% with Shell driving the project.
Analysts are concerned about the lack of liquidity in the share (Engen holds 57,5%) and some maintain a 20% discount to NAV.
Gasant says Energy Africa management is in continuous discussion with Engen to find a way to increase the free float.
AECI
Though Energy Africa hopes the oil price will stay in the mid-20/bbl range, speciality chemicals group AECI wants it lower.
The oil price is less relevant to the company these days: it considers itself a speciality producer less affected by commodity prices. But lower input costs would help anyway. A weaker rand (R9-R11/) also helps stimulate exports.
Its steady performance was affected by the global downturn, but it did better than expected.
The company has stuck to the task of cleaning out noncore businesses and its three-year transformation is now complete. Buying back nearly 40% of majority shareholder Anglo American's 53% at the beginning of 2001 boosted EPS 30%. But the buy-back left the group nursing gearing rates of about 43% and little cash. Gearing has since gone over 50%, after a top-up payment of R200m to Anglo American. But cash interest cover is a comfortable six times.
"The buy-back was completed at a relatively inexpensive R14,50/share and helped us unlock value," says AECI MD Lex van Vught. "The company was materially rerated as a result."
The weaker rand wiped out benefits from reduced ammonia costs . But the rand also made AECI's products more competitive domestically, against imports.
The Sans Fibres division made its first big global investment, of 26m in a US joint venture with the world's largest producer of textured yarns, Unifi . Van Vught says producing fibres in the US has tariff advantages. But growth will still come mainly from AECI's core divisions, he says.
Mining Solutions reported operating profit of R142m for 2001 and Sans Fibres R161m. Other businesses also performed well, generating R22m operating profit in 2001, while analysts expected losses of about R16m.
But group operating profit of R46m was offset by R20m higher finance charges and a R20m provision for post-retirement medical aid benefits.
"AECI is now a focused group with three successful business clusters," says Merrill Lynch analyst Nico Lambrechts. "Both Mining Solutions and Sans Fibres have revenues based on hard currency that exceed their hard-currency costs, thereby offering a rand hedge component."
Afrox
Hard-currency revenues are still small for gas company Afrox. Exports contributed just R100m to its industrial revenue of R1,7bn in 2001.
Afrox managed to capture over 50% of the welding products market in Australia and 40% in New Zealand within a few months . Now it's looking at the UK and US markets. "We can produce quality welding products in our SA factories cheaper than our competitors," says FD Rob Clarke.
Despite 2001 being a year of consolidation for the company , it grew revenue in the six months to March 2002 by 21% to R3bn.
This year, it has a R700m capex programme. It has already spent R500m on two hospital acquisitions and on increasing the gas cylinders fleet . Yet gearing improved from 34% to 31% .
Listed subsidiary Afrox Healthcare has been the fastest-growing division . It generates 60% of turnover and 40% of operating profit. But Clarke feels upbeat about the traditional gases and welding businesses. Afrox is linked to the fortunes of industrial companies. Growth areas are expected to be packaged chemicals, safety equipment, liquid petroleum gas into Africa, medical gases and gases used in the hospitality industry.
A devalued rand and volatile oil prices put pressure on Afrox's liquid petroleum gas business, which relies heavily on oil as an input. Sasol's natural gas project could also snatch large industrial clients away . But Clarke says Afrox's focus on the domestic and commercial markets will limit the impact.
Next year, the search will be for international growth . Analysts expect the oil price to stay in the mid-20/bbl range . But, like predicting where the rand will go, it will mean much gazing into the crystal ball .