Sa­sol: A break­out likely to fuel a 100% re­cov­ery

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

When Brent crude oil plum­meted over the past six months, Sa­sol fol­lowed suit – rapidly los­ing a large amount of its gains. But as the oil price re­bounds, the com­pany is now re­cov­er­ing.

Sa­sol’s pri­mary ap­peal is its po­si­tion as an in­no­va­tor in syn­thetic fu­els. It’s also a lead­ing man­u­fac­turer of a num­ber of chem­i­cals, from min­ing ex­plo­sives to poly­mers. The group has in­ter­ests in pro­duc­ing gas in Mozam­bique and Canada, and crude oil in Gabon. It also re­fines oil in South Africa and sup­plies pipe­line gas to industrial and com­mer­cial cus­tomers. Its most sig­nif­i­cant strength is its tech­nol­ogy, which it strives to keep cur­rent through con­tin­ued in­vest­ment in re­search and devel­op­ment.

Two ma­jor fac­tors inf lu­ence Sa­sol’s share price: t he oil price and t he per­for­mance of the rand against the US dollar. In the sec­ond half of 2014, Sa­sol, whose costs are mostly in rand, re­ported a 9% boost in prof­its be­cause of a weaker rand/dollar ex­change rate, but that was partly off­set by 19% lower Brent crude oil prices over the same pe­riod. For­tu­nately, a weaker rand soft­ened the fall in oil prices be­cause Sa­sol is a global oil pro­ducer.

How­ever, many an­a­lysts be­lieve that the world has al­ready reached “peak oil ” – the point from which nat­u­ral oil pro­duc­tion will steadily decline as re­serves run out. But be­cause Sa­sol is di­ver­si­fied, its syn­thetic fuel op­er­a­tions have huge growth po­ten­tial in this en­ergy-hun­gry world.

Sa­sol has worked on a num­ber of projects over the years, in­clud­ing be­com­ing the f irst com­mer­cial gas pro­ducer in Mozam­bique, was one of the f irst com­mer­cial op­er­a­tors of a gas-to-liq­uids (GTL) plant in Qatar, and op­er­at­ing a pu­ri­fied alu­minium pro­duc­tion plant in Ger­many. One of its big­gest un­der­tak­ings to date is a $8.1bn ethane (R97.2bn) ethane cracker in Louisiana. Sa­sol is ex­pected to make an in­vest­ment de­ci­sion on a GTL plant, at an ex­pected cost of $14bn (R168bn) at the same com­plex in 2016. Nev­er­the­less, its strate­gic po­si­tion­ing in the in­dus­try will al­ways place Sa­sol in a win­ning po­si­tion – when the price of Brent crude is steady and not volatile.

I be­lieve that the dip has pre­sented a good buy­ing op­por­tu­nity at a rea­son­able price. Af­ter plum­met­ing to a low of 36 000c/share, Sa­sol has now bro­ken out of its medi­umterm bear trend and is po­ten­tially form­ing the fi­nal shoul­der of an in­verted headand-shoul­ders pat­tern. As it ap­proaches the neck­line of the pat­tern (red slope), the weekly rel­a­tive strength in­dex (RSI) may pre­vent Sa­sol from con­firm­ing a pos­i­tive break­out above 50 000c/share.

How­ever, if the RSI re­mains bullish and sup­port is f irm at 45 510c/share, the re­ver­sal pat­tern would be con­firmed above 50 000c/share, with po­ten­tial gains to the 62 150c/share tar­geted mark – achiev­able in the short term (one to six months). There­after, I’d ex­pect a 100% re­trace­ment to its 65 300c/share prior high.

POS­SI­BLE SCE­NARIO:

Fail­ure to hold at 45 510c/share could at­tract sell­ing to­wards to the 36 000c/share prior low.

AL­TER­NA­TIVE SCE­NARIO:

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