"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."
To market, to market to buy a fat pig. It is always interesting to reflect on the crazy history that we have in our beautiful land and the thanks I guess that we should give for relative stability around. Standard & Poor's ratings agency however were having none of that Friday, caring less for the history and rather more about your future and ability to meet those obligations into the future. The ratings agency downgraded our credit profile, and by our, I mean South Africa. There are both short and long term profiles, there is both domestically funded and internationally funded profiles that the ratings agencies give an opinion on.
Reason cited for the credit downgrade at lower growth, higher relative current account deficits and rising government debt, as well as rising costs of external funding and the fickleness of those flows. Standard & Poor's expects more of the same from the existing government in terms of economic policy, no radical changes and more of the same. Which translates to slow growth, not quick enough sadly. The only worrying part I guess is that South Africa now, according to Standard & Poor's, issues government back debt that is at the bottom end of the scale of lower medium grade. A single notch above non-investment grade and speculative in nature.
That is at the core of the ratings teams and their decision on South Africa, although I do find it pretty laughable that if you were going to invest YOUR clients or pensions money, you would ask someone else that had no vested interest before making or taking a decision. That seems to me like asking someone who is not going to eat your dinner whether or not they would prefer fusilli or penne.
They are not even invited and they are not going to eat it, so why ask whether or not which one is better or tastier with a specific dish? I clearly understand that independent research is required when making complicated investment decisions and that is why the ratings agencies make valuable contributions when selling their research and advice onwards to investors, but clearly if you are at size and scale you should do your own thorough research? We do live in a complicated world and as such independent reports, where an enormous amount of work has gone into looking at all permutations hold weight, but do your own homework when making an investment decision.
As many pointed out post the financial crisis, the ratings agencies had made money, like everyone in the feeding chain, on giving the incorrect ratings at the time to specific wraps or products sold onwards to risk averse investors. A ratings turned into D's, in other words something that was supposedly completely safe and very investable was suddenly in default. I suspect that the ratings agencies and corresponding financial systems were all burnt in the same manner and we have gone from a time when everyone was gung-ho to a much more cautious and measured world. That is a personal held view, which is why the banking and financial regulations landscape is far different than before, the same applies to the ratings agencies.
But, it is all very well blaming X or Y for your problems, it is much easier to do that than to have to introspect. The Reserve Bank governor Gill Marcus made it clear that many of the problems that the local economy experiences are self inflicted. The ruling party bizarrely blames the government, for many, including insiders, it is one and the same. Again, these heated debates about the economy and the direction thereof are "robust" in part, but solutions for now are few. Capital will follow the opportunities, there is a single objective, to grow.
Talking about capital and objectives, the Russian gas company, Gazprom, has turned off the taps to the Ukraine, the country owes around 4.5 billion Dollars to the company. This is not the first time, as the FT article titled Russia cuts off gas supplies to Ukraine points out, this is the third time in eight years. First question, the end users are the Ukrainian people, is that right? Second question, why is such a large debt allowed to a foreign country? Is it a matter of living on the so called edge, the Ukrainian politicians were looting the state coffers instead of paying for the gas?
Luckily it is not mid winter and is rather close to the warmest time of the year in the Ukraine, a positively balmy 22 degrees maximum predicted for Kiev, the capital, today. Johannesburg? As cold as it feels and felt this morning, the maximum is going to be a chilly 18 degrees. To put it into context the average high for all 12 months around these parts is 21.9 degrees, the daily mean is 15.9 degrees and the average low is 10.1 degrees, which in Celsius is very agreeable. Let us just say that in Kiev, there is an even chance of snow being on the ground for three and a half months a year. It gets cold.
But this is all part of the bigger picture of ongoing conflict between Russia and the Ukraine. Where it is going to end is anyones guess, I suspect that both countries believe that there has to be peace, conflict is good for nobody in the long run. I believe that you also have to pay for what you use, nothing in life is for free. The beach, the sunsets and the sky I suppose are for free, if only because governments have not figured out a way to tax those yet. Perhaps the long lasting impact will be that the Ukraine will push for further reform and ironically make huge progress on renewable energies as a result of necessity. Humans are after all reactionary. Equally, do not try and understand the history and the conflict in the region, you will pull all of your hair out. And you need that. Just understand that it is there.
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!
Home again, home again, jiggety-jog. Markets are a little higher here in Joburg, markets in Europe are higher and US futures are higher. Spain and Portugal, oh dear, beer drinkers in Northern Europe 9 and Iberia a solitary one, where the life is more relaxed and full of cured meats and red wine. Sadly not today for those folks in Southern Europe, it is a long way back. Byron is gone for a couple of weeks, visiting some of the countries directly to the North of us here, it should be warmer, a good time to escape. Perhaps the best news is that we are a mere four/five days away from the mid point (from a sunrise/sunset) point of view through winter. Good thing.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
011 022 5440
No comments:
Post a Comment