Prepare for a slippery pole
Some crucial factors are beyond Sasol’s control, writes Stafford Thomas
Sasol is either a great buy or an incredibly overpriced sell. The wild card making Sasol a forecaster’s nightmare is the oil price, particularly in rand.
“Get the rand oil price forecast right and you are 99% of the way to making a decision on Sasol,” says Hanré Rossouw of Investec Asset Management.
Perhaps that’s overstating the case, but the oil price is obviously the crucial input that drives Sasol’s share price.
Over the past 10 years, Sasol’s share price has maintained a stable 79% correlation with the rand oil price. Put another way, 79% of the movement in Sasol’s share price can be explained by movements in the rand oil price.
And as everyone knows, the oil price has been on a grim downward slide over the past year, which has fed through into Sasol’s bottom line.
In a trading update for its year to June, Sasol said its headline earnings per share would fall by between 14% and 19% to between R51,74 and R48,73 per share.
This is perhaps a flattering account of its trajectory, given the fact that the oil price in the first half of the year was much higher, cushioning the impact of a devastating last few months.
In the first six months of its financial year, Sasol lifted its headline earnings 6% to R32, thanks to a rand oil price of R989/barrel. In the second half, however, the rand oil price tumbled to R708/bbl, pushing its performance lower.
This means that if you strip out the first half, Sasol’s headline earnings would have been almost 50% worse in the second six months.
Clearly the past financial year makes for grim reading.
But its new financial year got off to an equally rocky start. The rand oil price in July and August weakened further, averaging R681/bbl.
Sasfin Asset Management chief investment officer Liston Meintjes’ view is clear. “I would sell Sasol,” he says. “Its next set of figures will be far worse.”
Yet a majority of analysts still rate Sasol as a “buy”. Seven of the 15 analysts who cover Sasol rate it a “buy”, five a “hold” and three a “sell”.
Those who put an expected 12-month target price on Sasol’s shares reckon it could rise to R505,75 — about 24% higher than its current lows of R404.
The question is how reliable any of these forecasts are when the two primary variables — the oil price and the rand — are anyone’s guess.
The disparity of analysts’ views on Sasol is bewildering. Of 11 analysts polled by INet BFA, the consensus is that its headline earnings will fall 17% in the year to June 2016, before recovering 21% the following year.
Sasol’s own projections have also proved horribly wrong.
In its 2014 annual report the group noted: “Our view is that in the next five years crude oil prices will settle around $109/bbl”.
Sure, only the oil price is now around $49/bbl.
John Biccard, manager of Investec Value Fund, is not biting either. “Sasol is currently pricing in $70/bbl,” says Biccard.
Andrew Lapping, a portfolio manager at Allan Gray, which is a major investor in Sasol, puts figures on the current state of play. “At $50/bbl spot oil price and the current rand/dollar exchange rate, Sasol’s earnings will be R20, putting it on a 20 PE,” says Lapping.
To put that in context, a 20 PE would be almost double Sasol’s 10-year average of 11,2.
However, Lapping is not bearish on Sasol.
“We believe the outlook for the oil price is pretty decent,” says Lapping. “A fair number to use is about $75/bbl.”
It’s a story of fundamentals, however. And at the heart of Sasol’s woes lies the surplus ocean of oil washing through the world’s markets.
Last June, Brent crude oil was going for about $115/bbl. But then, the phenomenal rise in shale oil production in the US put the brakes on.
The shale oil revolution isn’t one we’ve seen in SA. But in the US, development has been nothing short of frenetic. By mid-2014, there were no fewer than 2 360 oil rigs operating in the US, according to oil industry services company Baker Hughes.
The result: US oil production spiked 60% to 9m barrels per day, on average. The US overtook Saudi Arabia as the world’s biggest oil producer.
The delicate oil supply balance teetered, then tipped over, from a shortfall to a surplus in the first quarter of 2014.
Experts expected Saudi Arabia to play its usual role as swing supplier and cut production. Instead, the lead nation in the Organisation of the Petroleum Exporting Countries (Opec) dug its heels in.
Wrong-footing many experts, Saudi Arabia set about defending
Demand may rise in the northern hemisphere winter, and production may fall in non-Opec countries such as the US, but it’ll take a while to tip the scales back