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Sasol diesel pricing update by Mark Ingham


Latest trends in diesel are positive for Sasol. Diesel pricing is reflecting growth in industrial production, with international distillate demand up almost 2 million barrels per day in the last year. Inventories have declined to the lowest in five years. 

Sasol produces 2,8 million tons of diesel a year and is 45% of its liquid fuels output. Synfuels is 70% petrol but Natref produces 60% so-called middle distillates and the gas-to-liquids operations produce low sulphur diesel.

A $1/bbl improvement in the diesel spread has a 1% positive effect on Group earnings assuming spot prices. Per my note last Friday, spot earnings for F2019 are roughly 5300 cents with the ZAR/US at R12,60, higher refining margins, and Brent at over $75/bbl. This is 30% higher than my base case for EPS in F2019. But, based on the 2020 forward curve on diesel crack spreads, earnings per share could be as much as R8 to R9 higher than 5300 cents. To put that in context, F2019 EPS is currently forecast at 4100 cents.

International maritime requirements for reducing the sulphur in shipping fuels from 3,5% to 0,5% with effect from January 2020, will positively affect crude oil and diesel pricing.

The outlook for Sasol earnings could change substantially for the better if these trends solidify.

In the short term, this may give support to the stock although currency and oil are still the main drivers.

I maintain fair value and target price of up to R450. At levels higher than that, going short is probably a more profitable strategy. But it is important to be alert to momentum to the upside given strengthening earnings fundamentals.    

Wishing you profitable investing, until next time.

Mark N Ingham     


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