Shrewd on crude? Riding the Sasol seesaw

Which JSE staples have the gurus at the Old Mutual Investors’ Fund been picking?

In the latest quarter, they deepened exposure to household names Bidvest and Outsurance. And, from zero, they started building positions in Dis-Chem and WeBuyCars. None of these stocks are really on the volatile end of the investment spectrum. A more spicy pick has been Sasol.

To be fair, the punt on the petrochemical giant was an antebellum choice. But the conflict in the Middle East has certainly accelerated an already compelling investment thesis, Old Mutual analyst Siya Mbatha said on Wednesday.

As any avid retail investor will tell you, Sasol has either been a sweetheart or a heartbreaker, depending on when you bought or, perhaps more importantly, sold.

Since the US and Israel started bombing Iran at the end of February, Sasol shares have rallied more than 50% to trade at about R215. Only a year ago, you could have picked them up for less than R60 each. Early in 2022, Sasol stock was trading above R400, but at the depths of Covid it was briefly below R30. How’s that for volatile?

The bad news

Historically, says Mbatha, there has been a clear link between the Sasol share trajectory and the price (in rand) of Brent crude oil. But over the past decade that has decoupled somewhat as Sasol racked up debt and ploughed billions into its punt on chemicals in the US at Lake Charles.

Debt is one thing, but when it then also becomes increasingly difficult to finance, as more and more investors pull up their noses at businesses that emit tonnes upon tonnes of CO₂, your share price will start deviating from what used to be its norm.

On top of that, Sasol was having trouble with its synthetic fuels business, for many years a mainstay in Secunda, where some of its inputs – its own coal, actually – was not up to snuff. And since 2022, Sasol’s chemicals business has also found it tough due to a supply glut mostly because of China adding ever more capacity.

By 2024, debt became a big enough problem for Sasol to start suspending dividend payments.

Looking up

But, says Mbatha, there has been a steady improvement on several fronts. The problem with more competition from China, for example, seems to be dissipating. “We are effectively over the big hump,” she says, adding that demand will grow into supply before long.

The conflict in the Middle East has led to a spike in crude oil prices. And the comedown won’t be easy. Even if we get a ceasefire today, high oil prices will likely be prolonged for three or four quarters, reckons Mbatha.

Remember how Brent crude was still at $60 per barrel in January? Old Mutual now sees crude trading above $80 for the rest of the year, and reckons it could go as high as $180. Pointing at the damage to oil infrastructure in the Middle East, Mbatha and fellow investment analyst Sisa Kobus think it unlikely that prices will go back to $60 per barrel soon.

All because of that chokepoint at the Strait of Hormuz, where some 20-million barrels of oil pass through every day. That is a fifth of global seaborne fuel trade. No wonder the hostilities have tightened global supply. And it is not just the oil and refined products, but the broader hydrocarbon value chain.

Think of things such as urea and ammonia for fertiliser, and ethylene, which is a building block for all sorts of chemicals and plastics. “Effectively every supply chain you can think of is affected by this,” says Mbatha.

A buy at R215?

Terrible for the inflation outlook. So much so that Kobus is pencilling in 50 basis points of interest rate hikes by the Reserve Bank this year. It could be as bad as 75 basis points, she says; on the best-case scenario the repo rate will stay unchanged. So, yup, bad for consumers everywhere. 

But not bad for Sasol at all. “Technically, they should be making a lot of money now,” says Mbatha. And the higher earnings will be a boon to Sasol bosses when it comes to paying down loans and corporate bonds. A closely watched metric is whether net debt stays sustainably below $3bn, as that would allow the company to resume distributions to shareholders.

“Sasol could pay a dividend within the next year, that is full-year 2027,” says Mbatha.

So, is Sasol a buy at R215? Or is the good news already priced in?

Old Mutual is diplomatic about this. On one of the analysts’ slides we find a choose-your-own-adventure checklist.

“To be a buyer [of Sasol stock at these levels] you need to believe the following:

• Oil stays higher for longer
• Chemical cycle recovers (pricing holds or improves)
• Synfuels volumes improve sustainably
• Management deliver [on] cost and capital discipline.”

ALSO READ:

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• From hot start to hot mess: Sasol’s big reversal

_{Top image: Sasol’s Secunda plant. Picture: Per-Anders Pettersson/Getty Images.}