Pain at the pump, gain on the share


Pain at the pump, gain on the share


Published Date: 2019-04-12 | Source: INCE|Community | Author: Mark Ingham

Pain at the pump, gain on the share

The price of 93 ULP petrol in Gauteng is now R15.94 per litre, up from R13.79 per litre in January, a rise of 15,6%. The oil price has lately been in Sasol's favour and whilst that may hit motorists in the pocket, shareholders conversely benefit as it is positive for the share price, with the stock over 20% higher than it was at the lower point in February.

Ingham Analytics has produced a fascinating insight on the dynamics driving Sasol's profitability and it cleverly unpacks earnings sensitivities, indicating at what oil price and rand/dollar exchange rate Sasol's earnings per share will be.

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Here are some interesting facts from the analysis that demonstrate just how sensitive Sasol is to the dollar price of Brent crude oil and the rand/dollar exchange rate:

  • A 10c change in the rand/dollar exchange rate will affect profits by R800 million if the Brent crude oil price is at $70/bbl.

  • A $1 per barrel movement in the price of oil price affects profits by R900 million, assuming a rand/dollar exchange rate of R14,10.

  • So uncertain is Sasol on currency that it has put in a massive $4 billion in currency hedges for this financial year and a further $700 million next year in order to lock in some predictability in cash flow at a time when debt is peaking as the mammoth Lake Charles chemical project in America comes on stream.

  • If oil had remained at $51 per barrel, the lowest point in late December 2018, and the rand was at $14,50/$ for a full financial year, then earnings per share would be half what Ingham Analytics is forecasting for the year ended June 2019.

  • If the rand was at R13,00/$ and if the price of oil halved from the current level of $70 to $35, then Sasol would be break-even and loss-making below that level unless the rand weakened.

  • Interestingly, whilst the Lake Charles chemical project will be loss-making this year it looks set, according to Ingham Analytics, to be a big contributor in future years, which helps reduce oil and currency sensitivity for Sasol.

What goes up can also go down so shareholders need to be aware that these external commodity and foreign exchange factors are fundamental to the investment case. Ingham Analytics neatly guides short-term day traders and longer-term investors to make the right calls.

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