Sasol: Buy, Hold, or Sell? Part1/3

Part 1: Sasol 101 Part 2: Sasol's business model and value drivers Part 3: What is Sasol worth?

In this months edition of Buy, hold or sell?, I decided to exchange my small-cap comfort zone for the big leagues. It sounded like a good idea at the time. Alas, you shouldnt believe everything you hear.

Coming to grips with Sasol was like bearhugging an eel. But anything for the BizNews community, so here we go. As always, the question of interest is whether our target is attractive at current levels? Is Sasol a good idea at R289-odd a share? I think so, and below I argue why but before we get to that, the structure of the article.

In Part 1, I briefly sketch what Sasol does. In Part 2, I list and discuss what I take to be the companys major value drivers. Finally, in Part 3, I conclude with a valuation and a recommendation.

Part 1: Sasol 101

Sasol is a R188-billion, JSE-listed, integrated fossil fuels and petrochemicals multinational. Dont worry if you needed to repeat that slowly, I had to as well, and I wrote it! Jokes and confusion aside, making sense of Sasol will initially require a bit of rough and tumble in the weeds. But Im quietly confident that if nothing else you will find the journey pretty interesting.

Fossil fuels and petrochemicals: What are they?

Fossil fuels: Oil, coal and gas

In essence, oil, coal and gas are what the chemically inclined would refer to as hydrocarbons. More accurately, each is a mixture of different kinds of hydrocarbons. A hydrocarbon is simply a molecule consisting of hydrogen and carbon atoms, hence the name hydro-carbon. The shortest chained hydrocarbons those with the fewest carbon atoms and simplest shapes are typically in gaseous state and include things like methane, ethane, propane and butane (the primary constituents of natural gas). Those containing five or more carbons are usually in liquid form, the hydrocarbon precursors for making petrol, diesel, etc. And finally, those with the longest chains things like wax or tar are typically solids.

Petrochemicals

Petrochemicals are all those chemicals and there are many that are ultimately made from petroleum. (Petroleum is the Latin for rock oil, not to be confused with petrol, which is one of the many kinds of refined products that can be made from petroleum).

The fossil fuels and petrochemical industry 

Recall that fossil fuels oil, coal and gas are mixtures of different hydrocarbons with different chain lengths and shapes. One of the most economically attractive features of these hydrocarbon chains is that they can be broken apart, mixed, distilled or stitched together to form other hydrocarbons. In other words, you can take oil, gas or coal, separate it into its various hydrocarbon chains, and then build whichever hydrocarbon or hydrocarbon-derived products you may require. Examples of such useful oil-to-other-product possibilities include paraffin, petrol, diesel, plastic, paint, rubber, glue, fertilizer, cosmetics and textiles.

Performing these chemical and industrial transformations is exactly what much of the fossil fuel and petrochemicals industry is about. I will briefly describe how such fossil fuel alchemy is performed with reference to Sasol.

The Sasol business model and value chain

As I noted in the introduction, Sasol is an integrated fossil fuels and petrochemicals multinational. They are integrated in two ways. Firstly, Sasol is vertically integrated in that the company not only turns coal, oil and gas into refined fuels, but it also supplies a material proportion of its coal and gas feedstock needs from its own mines and gas fields. And secondly, Sasol is horizontally integrated in that it not only produces refined fuels, but also more specialised petrochemicals, a division of labour typically not performed under one roof. Finally, it is multinational in that they do these various economically significant things in multiple jurisdictions: South Africa, Mozambique, Qatar, China, Germany, Italy and the USA.

Lets dig a little deeper. (Part2)