Looking good due to oil price and US project

The 2019 financial year will be a defining one for synfuels and chemicals producer Sasol, and already it’s off to a good start.

The company share price had increased 41% in the past six months on the back of the oil price rising from $70 to $80 a barrel since January. This puts a strain on SA’s petrol consumers, but it is a bonus for Sasol — which produces synthetic fuels from coal from its Secunda plant at a breakeven price of $40 a barrel. Though global oil stocks are in deficit, Opec (the Organisation of the Petroleum Exporting Countries) has indicated it has no intention of increasing oil output any time soon. This will keep oil prices high, if not push them higher.

The oil price is not the only thing going for Sasol. The worst appears to be over for its Lake Charles Chemicals Project in the US, which had been hit by cost overruns of $2bn and had damaged investor sentiment.

Now 88% complete, the $11.3bn project is on track to start coming online before Christmas, when it can start paying off.

It’s expected the project will contribute between $250m and $300m in cash flows in the 2019 financial year.

In a note, analysts from JPMorgan said Sasol continues to head in the right direction.

Domestic costs appear under control and the chemicals project is approaching beneficial operation.

“Importantly, after years of heavy investment … capex looks set to fall materially and we believe Sasol is on the cusp of a significant turnaround in free cash flow — the best we can find of any major oil/ chemical stock in our universe,” the note said, labelling this a “cash mountain”.

Next year, the balance sheet will be geared to between 40% and 44%, but from 2020 it will begin deleveraging rapidly. Sasol teams continue to lay the groundwork for potential acquisitions so that when significant free cash flow starts to pour in, it can be well spent. The company has, however, promised not to spend more than 10% of its market valuation on capital expenditure in any given year, and has said it will never again embark on projects as large as Lake Charles without a partner.

Sasol has communicated its clear intention to increase investor returns too. JPMorgan analysts forecast dividends could double in three years.

And it’s not in the price, they said. “Sasol’s share price has rallied with the higher oil and weaker rand. However, we still do not believe the stock is discounting spot — in fact, it looks cheaper than it has done for a while, in our view.”

A number of one-off items hurt the company earnings for the year ended June 2018,

The scrapping of the company’s gas-to-liquids plant in the US and divesting from Canadian shale assets, for example, were large impairments. A R2.9bn share-based payment to its Khanyisa empowerment scheme also hit profits.

Interrupted electricity supply had hurt production and sales and the company is in the process of remedying this with the assistance of state-owned power utility Eskom. The strong rand also affected Sasol’s Chlor Vinyl business, which makes plastic piping, and it suffered a R5.2bn impairment. The currency has since weakened — not just because the country has slipped into a recession, but in the medium to long term it is weakening in line with other emerging markets which have fallen out of favour as the US continues to hike interest rates.

One risk to the outlook, which will show itself soon, is a strike by trade federation Solidarity. Its members, mostly white and highly skilled Sasol employees, have embarked on industrial action in protest against being excluded from Sasol’s new employee share scheme, which is intended to boost the company’s black ownership.

The industrial action was orchestrated to coincide with a three-week planned maintenance shutdown at Sasol’s Secunda and Sasolburg plants. According to Solidarity, delays in restarting operations will come at significant financial cost to the company.