Also there and forcing the oil price higher and higher are the conflicts in Northern Iraq. The only real benefactor of this on the local market Friday was a massive move northwards from Sasol, up 4.3 percent on the day. This is all attributable to the weaker Rand and the stronger oil price. Michael wrote about this impact last year, in a piece titled The Sasol Hedge fund, this paragraph is important:
"According to the (annual) report, for every $1 increase in the price of a barrel of oil, Sasol's operating profit will increase by $67 million. When it comes to the exchange rate, for every 10c that the rand weakens, their operating profit increases by R 939 million under the assumption of $108 a barrel, and at the exchange rate of R 9.05."
Of course the Rand is far weaker now than in September of last year and equally the Oil price is stronger. That translates to significantly higher than anticipated profits for Sasol, we are currently in the last month of their financial year end. In their interim results, Sasol suggested in the CFO's presentation (acting CFO at the time, Paul Victor):
"We estimate that a 10c change in the annual average rand/US dollar exchange rate and a $1 change in the crude oil price will affect our profit from global operations by approximately R936 million and R702 million, respectively."
Yowsers. So a four or so Dollar move in the oil price makes a considerable difference in terms of the annual profits, but of course these are all very short term moves. I read an article over the weekend that suggested in terms of the lack of volatility in the oil price, this was the best period (from a planning point of view) since the seventies, when long hair and Bjorn Borg was all the rage. And early technology was being built on back then. And Sasol listed at the end of that decade. TV became a big form of entertainment back then too, not that it was not, but more and more so.
I guess as a Sasol shareholder you have to be cognisant of the lack of recent volatility and as such the reliability of earnings increasing has been largely the Rand and NOT the oil price. It takes time to shunt volumes higher, loads of time. I guess the difference with Sasol is right now you are in a wait and see whilst we ramp up and de-risk the business geographically. And what I mean by that is the plant in the US, at Lake Charles in Louisiana, is a monster change in the makeup of Sasol as we know it. As a company with a serious US presence a rerating could and should come.
In terms of the timelines of that, if you needed a reminder, we should know on the final investment decision in the ethane cracker by the end of this year (perhaps in the final results) and the GTL plant investment inside of the next 30 months, i.e. by the end of 2016. In the meantime, do not get anxious "things" are moving fast, as per the interim report, David Constable had this to say:
"In Louisiana, we have successfully commissioned our first-of-a-kind 100 000 ton per year ethylene tetramerisation unit for the production of co-monomers. We expect the plant to be fully operational by the end of this financial year."
NOW you are wishing that you had paid attention during those chemistry lessons. The announcement to build this plant came in December of 2010, it has been a long time coming. As per the original announcement,
Sasol to build world's first ethylene tetramerisation unit, Sasol have dumbed down (luckily for me) what the end product is going to be used for. See here:
"The products impart special characteristics of elasticity and strength in plastic used in consumer products such as food packaging, bags, toys, automotive interiors, power cable coatings and more." Stretchy plastics!
I suppose the conclusion to this piece is much the same as before, the business is changing and will continue to be in a wait and see phase for the better part of half a decade. Execution risk is a reality, but the company has done this before many times. As ever, in a fluid environment it can all change quickly. We continue to hold the stock, the dividend underpin is still impressive, even at these elevated levels. The stock touched 650 Rand this morning.
Interestingly the all time price for the Sasol ADR (the Dollar reflection of the Rand price, tradable in New York) is
65.94 Dollars set on May 16 of 2008. 6 years later and due to the weaker Rand we are at an all time Rand high, but yet the price is 59.58 Dollars in New York, as per the last close. If the Sasol ADR price was at the high, at the current exchange rate of 10.75 Rand to the US Dollar, the share price would be above 700 Rand a share. But of course the bulk of the volume and value takes place from here, in Jozi!