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.

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­week.co.za Jor­dan Weir is a trader at BayHill Cap­i­tal.

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.

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