Back in the saddle again
The petrochemical giant took a massive knock in 2014 when the oil price fell, but its share price has stabilised and may improve on the back of rising oil prices.
sasol is an international integrated chemical and energy company with a well-diversified portfolio focusing on coal, crude oil and natural gas. While it is energy facing, one could also view Sasol as a major chemical engineering firm or even an industrial technology firm, given that the company has been part of pioneering the energy industry through quantum mechanics, notably through the use of Fischer-Tropsch Synthesis. This is basically a chain of chemical reactions that convert a mixture of carbon monoxide and hydrogen gasses into liquid hydrocarbons such as gasoline or kerosene.
By harnessing such chemical reactions, Sasol can turn both gaseous and solid fossil fuels to liquid energy such as diesel, petrol and kerosene for commercial use. These processes have been termed “gas-to-liquid (GTL)” and “coal-to-liquid (CTL)” respectively. More recently, biomass (any inedible organic matter derived from living organisms) is being used to create new sources of energy in a step to embrace the renewable energy movement.
As an energy play, Sasol’s revenue is largely driven by two factors – the oil price, as this determines the selling price for Sasol’s product, and the rand/dollar exchange rate – while its cost structure is influenced by its input costs (i.e. coal or natural gas). But given its unique technologies, Sasol has the long-term ability to fit into energy niches that that make it attractive in the long run. Its CTL technology has the ability to create material value in countries which are rich in coal deposits, yet short of liquid oil reserves.
Likewise, in gas-rich countries, the company’s GTL technology can adjust the energy mix, and, while controversial, it means the organisation can benefit from fracking. However, accessing the long-term potential of its technology requires very lengthy projects, planning and massive capex. Unfortunately Sasol has a history of its large projects coming in late and over budget.
But while it is useful to understand the long-term potential for Sasol, the stock is still largely an oil and currency play. Hence, after Opec cut oil output during late 2016, the oil price subsequently stabilised around the $55 per barrel mark and, while we think it is difficult to forecast commodity prices, we could see oil over $60 a barrel by the end of 2017, if current production cutbacks and increased consumption trends remain in place. Brent crude oil is also now trading above both its 50- and 100-day moving averages, after falling from grace in 2014.
After falling 42.37% following the oil price slump in 2014, Sasol’s share price has found support around the R360 level and is currently trading at around R370. On a trailing priceto-earnings ratio (P/E) of 11.58 times, a forward P/E ratio of 9.7 times and a dividend yield of 3.5%, Sasol represents an attractive opportunity at this stage.
More recently, biomass (any inedible organic matter derived from living organisms) is being used to create new sources of energy in a step to embrace the renewable energy movement.
Sasol’s new headquarters in Sandton.