Sasol and ExxonMobil Have a Lot in Common

In this analysis by Chuck Saletta, a respected contributor at Motley Fool, the spotlight is on Sasol (NYSE: SSL), South Africa's energy giant facing monopoly pricing accusations. Saletta draws a parallel with ExxonMobil (NYSE: XOM), emphasizing the contrasting regulatory landscapes and business dynamics.

South African investors are likely well aware of energy giant Sasol (NYSE: SSL). The company plays such a dominant role in South African energy that it has had monopoly pricing accusations levied against it due to how it prices natural gas in the country.  

In addition to its very strong energy business, Sasol has a huge chemicals business, providing base materials for agriculture, fabrics, sun screens, cleaning, personal, and healthcare products. That combination of energy and chemicals -- along with its future-focused ventures and eco-driven arms -- make it a huge presence in South Africa, and one that likely will be around for a long time.

Still, the monopoly pricing accusations do showcase one risk point that the company is facing. Namely, if regulators do attempt to reign in the company’s business to try to protect consumers, it could have a fairly substantial impact on Sasol’s near-term profitability.

With that in mind, it makes sense to look at a similar company based in the United States, ExxonMobil (NYSE: XOM). ExxonMobil started its existence as Standard Oil, a company broken apart in 1911 for being too large and powerful a monopoly. Exxon and Mobil were two of the companies that resulted from that breakup, and they re-merged in 1999 to create today’s ExxonMobil. 

Today’s ExxonMobil is large, but not considered a monopoly. That distinction should give South African investors something to consider as they ponder what may happen if Sasol continues to get challenged and ultimately restricted for being too dominant in the country’s energy industry.

What does ExxonMobil’s business look like compared to Sasol’s?

Similar to Sasol, ExxonMobil has business lines that stretch between traditional fuels and related chemicals, along with future-focused, lower-carbon sectors as well.  As ExxonMobil does not have a monopoly position in its industry, its net profitability is solid, but not outrageous. Over the past four reported quarters, ExxonMobil posted $41.1 billion in net profits, on revenue of $346.1 billion.  

That’s a net profit margin of around 11.9%,  which while solid, reflects the realities of the competitive and capital-intensive nature of the markets that ExxonMobil competes in.

On the surface, one might think that Saosl, with its very similar net profit margin over the past year,  should be okay if its operations get restricted for being too monopolistic. The problem is that if competitive pressures start to force Sasol to lower prices, it would need to cut its costs to keep its margins at that similar level.

From a growth perspective, ExxonMobil is expected to deliver $347.9 billion in revenues in 2023 and $355.9 billion in 2024, for about a 2.3% revenue growth.  ExxonMobil’s longer term forecasts expect energy demand to increase by around 15% globally by 2050 , with coal being the hardest hit traditional fuel source.  If that combination of projections holds true, that should result in a fairly stable set of growth prospects for ExxonMobil over time.

As South Africa has been challenged with rolling blackouts and other energy infrastructure challenges,  there is a case to be made for faster near-term growth prospects from Sasol than ExxonMobil. After all, there’s a clear need for more energy supply to meet existing demand in Sasol’s South African home turf. While the potential is there, issues at Eskom, the country’s primary electricity supplier , may mean it could take a long while for there to be sufficient infrastructure to supply that existing demand.

A key thing to note for any energy investor

If you’re considering an investment in either Sasol or ExxonMobil, it’s important to understand that both companies operate in a commoditized and economically sensitive business line. The price of oil and natural gas play a huge role in both company’s ability to earn money.

While the demand for energy looks like it will continue to increase over time, the price that either company can command for its products will vary wildly based on those commodity prices. As a result, investors in either business need to be prepared for ups and downs in their profitability based on commodity-related factors that are not entirely in either company’s control.

With a long term perspective and an eye on how the company manages those swings, shareholders may still find themselves with a business worth owning.

At the time of publication, Chuck Saletta’s son owned shares of ExxonMobil in an account where Chuck serves as the custodian.

Want to know more about the latest research?

Should You Invest in Defence Stocks?

Space Exploration Stocks: Are They Worth Investing In? 🚀

Can You Invest Like Warren Buffett? 🎩

Sources: SSC, New York Times, JP Morgan, Reuters, Investors.com, Yahoo Finance, Bloomberg, Forbes, Open AI, Tech Crunch, Nerd Wallet.

Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an external contributor as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.