Is there still gas in Sasol’s tank?
Despite the massive drop in the price of Brent crude oil, which is down to below $50 f rom more t han $100 a barrel a year ago, I believe it’s a good time to buy Sasol.
While prices are expected to remain under pressure in 2016 – Vitol Group, the world’s largest independent oil trader, is predicting $40 to $60 a barrel into next year due to oversupply in the market – Sasol continues to perform well operationally. The petrochemical group, whose share price is down more than 30% since its peak in June 2014, has grown liquid sales volumes by 5% to 61.5m barrels in the year to end June, conserved cash to the tune of R8.9bn in the first six months of the year, and realised cost savings of about R2.5bn, that is R1bn more than planned.
The cost savings formed part of Sasol’s restructuring, which saw 2 500 employees take early retirement or voluntary retrenchment packages and led to a simpler business model. Implemented in 2012, CEO David Constable said at the time the plan aimed to “fix the roof while the sun was shining”. Ongoing cost savings of at least R4.3bn a yea r (compared with 2013 numbers) are targeted by t he end of t he 2016 f inancial year. Overall, the group reported a 17% decline in headline earnings per share, leading to a 14% cut in its dividend for the year to R18.50 (also see page 14). On average, Brent crude prices were down 33% for the financial year to end June, compared with the previous year.
Its chemical operations were the star performer, with base chemicals (products like fertilisers and polymers) growing profit from operations by 51% to R10.2bn, and performance chemicals (which include wax) improving 7% to R12.7bn. Its Exploration and Production International (EPI) business, which includes its Montney shale gas assets in Canada and gas assets in Mozambique, cut its losses to R3.17bn from a loss of nearly R6bn in the previous f inancial year.
The future seems bright for Sasol, as management remains meticulous and resolute. Despite putting a few projects on ice, it remains on track to complete
ON its $8.9bn ethane cracker in Louisiana in the US in 2018, and also plans to expand production in Mozambique. However, one needs to keep a close eye on the oil price in rand, which is the most important driver of Sasol’s earnings. To put it into perspective; a 10c move in the rand against the dollar over a year can affect the bottom line by R650m. Going forward, Sasol should be a good investment, provided that the rand oil price remains close to, or exceeds, R600 a barrel. In addition, it’s outperforming all its peers on the Resi10 Index. EVERY FRIDAY
Sasol i s potentially forming a double-bottom pattern at R360/share, which would be confirmed above R500/share. It recently breached the resistance trendline of its short-term bear trend (formed within its huge consolidation pattern), and upside above R455/share would make a good entry point. However, this position should be revised at R500/share, as Sasol has encountered resistance there before. Otherwise, continued upside would warrant an aggressive reload above that level, as upside to the objective of the double-bottom pattern at R640/share would be possible.
A LT E R N AT I V E S C E N A R I O :
Medium-term consolidation would persist below R383/share. However, support must hold at R360/share, or else Sasol could fall to the downside target at R220/share.