Oil bulls are currently scratching their heads wondering what has gone wrong. The outlook has changed quite quickly and dramatically so.
The outlook for 2020 by analysts is now leaning towards the negative. The reason? Rising shale production, an extended trade war and a slowing global growth. Demand has also taken a hit - China’s forecasted economic growth for 2020 has been revised down to 6% by the IMF, the lowest since 1990. China is the world’s biggest importer of crude oil, and commodities overall. The longer the trade war lasts, the worse it gets.
One ray of hope for the bulls are the shipping fuel changes, known as IMO 2020, which will ban ships from using fuels with a sulphur content above a certain limit. This should increase demand for diesel and will cause a bit of a shake-up in the industry.
Given this operating environment, we take a more in-depth look at Sasol.
Sasol is obviously greatly influenced by the oil price and what happens in the oil market. Whatever was happening in the oil market, good or bad, Sasol always had an ace up its sleeve, namely their Lake Charles (LCCP) project. Once fully operational, it would roughly triple Sasol’s chemical production capacity in the US and further strengthen its position in the global market. This could prove to be especially valuable in the current oil market, providing some form of relief. The only problem was that management got their cost estimates for the Lake Charles project slightly wrong (again)…by about $1 billion wrong. In an already struggling oil market, this led to Sasol being sold-off even further down to R349.61 on the 24th of May. At that stage it had lost 28.5% in a month, falling from its most recent high of R489.50 on the 24th of April.
A lot of good news regarding the Lake Charles project was priced in, so when the cost estimates increased yet again, investors lost faith in management and sold. It wasn’t the first time the project costs had to revised – in 2014 it was originally estimated at $8.9 billion and most recently revised in May 2019 at $12.6 - $12.9 billion. So, it is understandable that some investors lost patience. Recently, it has started to consolidate and recover closing at R379.45 last week Friday.
Our view: We like SOL for a short-term trade. We think it is oversold, and the disappointment of the Lake Charles project cost revision fully reflects in the price. The Bloomberg consensus analyst target price for Sasol (SOL) is R443.72. Longer term it is too difficult at this stage to take a view as there are too many unknowns with regards to the supply and demand forces in the oil market, and with analysts leaning towards being negative. Events to keep an eye on is the OPEC meeting on the 25th and 26th of June, and the G20 meeting on the 28th and 29th of June.
Stephan is a portfolio manager and full-time trader. He developed his passion for the markets while working in the Stockbroking division of Standard Bank and is especially passionate about CFD trading. Stephan studied at the University of Stellenbosch and completed a BComm Honours (Business Management) with a focus in Portfolio Management and Bonds. He has also passed the JSE Equity Trader’s Exam, RE5 (Representative) and RE1 (Key individual) Exams as well as the Registered Persons Exams (RPEs) in order to give advice on equities.