Sasol. This changes everything.

The SASOL CHIEF FINANCIAL OFFICER UPDATE, 3 December was released yesterday. The highlights are many, including a production record at Oryx in Qatar, as well as another cracking (no pun intended) performance from Sasol Synfuels. The weaker Rand helped Sasol, the currency has of course weakened by 5 percent since the end of the Sasol financial year. And the Rand continues to remain weak, whilst the oil price has stabilized at these sorts of levels currently, which have been surprisingly stable. Amazing, in fact, if you think that for the better half of two years the oil price has been range bound and mostly in the 90 odd dollar range for WTI. Occasionally, like at the beginning of last year the oil price spiked when there were more than just a few issues in North Africa, the Arab spring. Sadly for the people of Syria, this is ongoing. It is disastrous to think that in a time like this, 2012, there are atrocities like that happening. I guess progress is relative to where you live.


The announcement that struck us as a "this changes everything" type announcement this: Sasol commences the front-end engineering and design (FEED) phase for an integrated gas-to-liquids and ethane cracker complex in Lake Charles, Louisiana, which of course is in the US of A. Why does this change everything in our opinion? Because if you do not have a serious presence in the US, even though you posses world class technology at that sort of scale, then prepare for a lower valuation. I guess that is the sad way of looking at it. Costs for this plant in Louisiana are expected to be between 11 to 14 billion Dollars. A mere 97 to 124 billion Rands. As a percentage of their market capitalisation, at the top end of the range, that is more than 50 percent. Now you get the sense of how big this really is. Add on top of that the cracker costs at the same place of between 5 to 7 billion Dollars (44 to 62 billion Rands) and at the top end of the range this plant collectively at Lake Charles will cost 186 billion Rands. That is more than three quarters of their current market capitalisation. Wow. Now you can appreciate the size and scale and our comments earlier that this really does change everything.


At full production, sometime in calendar year 2019, Sasol will produce 96 thousand barrels a day of "high quality transportation fuel, including GTL diesel and other value-adding chemical products" as per the release. And the cracker will "produce an estimated 1,5 mtpa of ethylene with downstream derivative plants." Let me just make this clear to you, this will be the biggest project of its kind in the US, and the second biggest gas-to-liquids plant on the planet, after the disastrous Shell project (Pearl) in Qatar. Disastrous for Shell because of the overruns and costs that exceeded budget by a factor of three! The cost ended up being a whopping 19 billion price tag for Shell. And costs, operational costs for Shell were more than they anticipated. So, as you can understand right now, there are more than just a few concerns about Sasol's ability to be able to execute on this sort of size and scale project.

This is the culmination of long and hard work, getting it "right" in Qatar after lots of teething problems, and exploring the USA option for about a decade now. The fact that I can read into the US being a better option over the Canadians is fairly interesting, perhaps location was key. As Sasol say about Louisiana in their wonderful (you must read it) report titled Value through excellence. Unlock the full value of natural gas. Gas-to-liquids: "The area was clearly poised for further growth and investment, and Sasol envisioned a partnership yielding significant benefits for the company, the community and state. A sizeable capital investment made a multi-million dollar impact on the region, yielding 50 new positions for research scientists, chemists and engineers. Also, by partnering with Louisiana universities, Sasol's R&D facility has helped enhance university programmes and enrich the educational experience of numbers of Louisiana students." This is hugely beneficial for the local economy, but the New York Times in the aforementioned article has their reservations.


The full release, jumping back to the guts of the Sasol announcement yesterday, indicates that the synfuels guidance for the full year was re-affirmed at 7.2 to 7.4 million tonnes for 2013. Interestingly the guidance for earnings for the full year uses the word "solid", I am not exactly sure how you would quantify that. Solid suggests no problems.


So that was the biggest announcement for us here, on the Sasol front yesterday. And even though first production in Louisiana might only be 2018, that is a full six years away. Jacques Kallis would have retired by then I guess. He is amazing. And to think that he had many detractors whilst he was on his way to greatness. Perhaps Sasol are a little like that too. A South African gem with unrealised greatness by the investment community, nothing like a full production plant in the USA just to attract a different set of investors. Who could of course re-rate the stock to a better valuation for all concerned.


In trying to explain this not so technical to understand piece, the analyst community have pencilled in 45 ZAR earnings for the current financial year and 44 ZAR the next year. So to be fair to the current share price, earnings are expected to taper off through to June 2014. And 2015, which seems like a long way away the expectations are for just less than 47 ZAR. But even if the stock was re-rated to a 12 times earnings multiple, at the current expectations we would be closer to 540 ZAR. Instead of that that lofty price, we find ourselves at 370 ZAR, there and there abouts. Roughly 8 times forward earnings, with a forward yield of nearly 5 percent. This is not uncommon though for oil and gas companies, just yesterday I was looking at the largest Italian oil company Eni SpA trades on a 9 times earnings multiple with a 5.7 percent dividend yield. ExxonMobil, the big daddy of them all trades on an earnings multiple of 9.25 with a dividend yield of 2.6 percent. Sasol are going to have to do a lot to convince investors that they should pay up for a more profitable entity. Therein lies both the key and the risks currently. This is a huge step forward into exciting territory. We continue to accumulate the stock on weakness.