SOL-THE SOUTH AFRICAN INVESTOR

THE SOUTH AFRICAN INVESTOR

SOL


This too shall pass…

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By Neo Tema
16 March 2020


With Saudi Arabia dumping oil on the international market cheaply,
Oil prices fell 30% on 9 March 2020 and plunged stock markets world-wide.

 

The world’s largest producer of synthetic fuels and chemicals-giant:

SASOL Ltd (JSE: SOL),

Had its stock price fall from R159.72 to R50.78 during the week ended 13 March 2020.
 

This comes on the back of a junk rating on SASOL bonds by Moody's,

Fears over a possible rights issue,

Coronavirus and cost overruns on the Lake Charles Chemicals expansion project.
 

This article looks at the previous financial performance of SASOL during a period of low oil prices,

Whether the low oil prices mean doom for the company as reflected by the stock price and gives an opinion on whether a rights issue is necessary.

SASOL Ltd is a diversified petroleum and chemicals business.

Half of SASOL produces and supplies synthetic-petroleum goods from coal and practically sells all of it in South Africa.
*Please note that this article on looks the petroleum part of the company.

 

SASOL SA (SSA), (a subsidiary of SASOL Ltd),

Domiciles the South African operations.
 

For the financial-year ended *30 June 2018,

SSA generated operating cash flows before tax, finance costs and working capital of R28 billion (2017: R22 billion).

*The 2019 SSA figures have not been made public.
 

The below graphics illustrate SSA's operating cash flows before tax, finance costs and working capital for the years 2018-2015.
 

SSA 2018-2017.
Cash_Ltd

 

SSA 2016-2015.
cash_ltd_2016


 

Oil price recent history

oil


Explaining the SSA operating cash flows earned using the oil price chart

2015

  • R28.6 billion was after starting the year with a high oil price that sharply declined as the year went on.

2016

  • R22.4 billion came from a decline of oil prices on the back of the 2015-16 energy crisis.
  • At one point the price went below $30 (see chart above).

2017

  • R22.5 billion was on the back of oil prices hovering at the $45-50 price level for the year.

 2018

  • R28.4 billion was after the oil price shot-up from $45 to $75 by the end of the financial year.

2019

  • Financials not publicly disclosed.
  • The oil did fall and we expect that cash generated to decrease as prices fell to 2017 levels.

2020

  • The oil-price situation currently resembles that of the 2016 financial year.
  • Assuming the oil price does not drop further,
  • We expect cash generated to approximate 2016 levels.

The economics of SASOL petroleum-fuels.

The fuel price in South Africa is regulated and set monthly with reference to the international oil price.

SASOL petroleum’s local competition include

  • BP,
  • Shell,
  • Total and
  • Engen.

These competitors;

Prior to refining oil into different products,

Have to importalmost-all of their crude oil needs using international US-dollar oil prices using an already-battered Rand.


This gives SASOL a cost competitiveness advantage.

  • SASOL locally-converts coal to oil using synthetic methods to meet its oil needs.
  • By incurring most of its costs in Rand and making use of South Africa's abundant coal, costs can be kept down.
  • On top of that, it gets to sell its fuel locally at international prices.


By our estimates(which could be horribly-wrong),

It costs SASOL around R4-6 to produce-and-deliver a litre of fuel to its stations.
SASOL Cost per litre estimate.xlsx


Fuel taxes and levies

For every litre of petrol and diesel sold;

The South African government gets to keep R5.84 and R5.70 in taxes, respectively (Businesstech).
 

From the current price of unleaded 95 of R 15.84 per litre,

Only R10 is available for fuel companies to recover their costs and make a profit.


SASOL's competitors have to pay approx. R7.40 per litre to get fuel to filling stations.

 At its current estimated cost of R4-6 per liter;

SASOL has room for to absorb decreases of R5 (and potentially more) per litre.


It is expected that local petrol and fuel prices will go down for April 2020.

We consider it highly unlikely that the regulators will drop the price below R10 per litre any time soon as this would significantly highlight how the fuel levies make up the fuel price.


Currently the fuel levy makes up about 34% of the fuel price.

Were it to move to >50%, social unrest could potentially force government to cut levies.


"It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable way of carrying it on"- Sun Tzu

 

From the above

SASOL has demonstrated in 2016 an ability to profit from a low oil-price.

The company’s synthetic methods of converting South Africa’s abundant coal reserves to oil gives it a competitive advantage over its competitors. 


In terms of the local petroleum industry,
Price decreases will squeeze SASOL's competitors to tighter.
This is as the fuel levies of R5.84 will remain the same irrespective of price movements.


SASOL will be last party to make a loss from the local fuel business.

Given its extra-room to absorb losses,
 

In such a situation,

Fuel regulators will be forced to either (1) raise prices or (2) cut the fuel levies.
 

Where the government does not put an extra rand back into Engen, Total and BP’s pockets;
 

It risks jeopardizing the local fuel supply market as the above companies will be forced-out.

Incumbent governments love their tax revenues.

Its unlikely Oom-Tito will cut levies.
 

Everyone behaved badly last week.

There was no need for the panic-selling.

At one point SASOL had a capitalization of R18 billion.

  • How can a company that produced recent annual operating cash flows before tax, finance costs and working capital of R48 billion sell that low?

The market is not efficient (never has).

Fear and optimism drive actions.

A lot of us finance professionals can be found guilty of not treating the stock market with detachment.

There is no cause for concern with the SASOL's fuel business.

Nor is there any need to perform a rights issue.TSAI

Resources
SSA 2018 AFS-SSA_Annual_Financial_Statements,_30_June_2018_0.pdf
SSA 2016 AFS-Sasol_South_Africa_(Pty)_Ltd__Annual_financial_statements_30_June_2016.pdf
Cost per liter estimate-CE.xlsx
Production and sales quantities
2016-Production_and_Sales_metrics_for_the_12_months_ended_30_June_2016.pdf
2018-Production_and_Sales_metrics_for_the_year_ended_30_June_2018.pdf


 

 *******************************************************Dedicated to Maseshego Arnold Bohlale Nkgapele*******************************************************************