Sasol: A breakout likely to fuel a 100% recovery
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.
Failure to hold at 45 510c/share could attract selling towards to the 36 000c/share prior low.