Pre­pare for a slip­pery pole

Some cru­cial fac­tors are be­yond Sa­sol’s con­trol, writes Stafford Thomas

Financial Mail - Investors Monthly - - Feature -

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

Pic­ture: iS­TOCK

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