Excellent report on an under appreciated commodity sector
Comment of the Day

November 10 2010

Commentary by Eoin Treacy

Excellent report on an under appreciated commodity sector

Thanks to a subscriber for this thoughtful report by Jarrett Geldenhuys and Pavel Kushnir for Deutsche Bank which highlights a share exhibiting the kind of base formation completion one simply does not come across every day. Here is a section:
Sasol's GTL expansion will need to either be based on a partnership with a significant gas resource holder or producer, a significant exploration find or a potential resource acquisition.

Identified regions which could be receptive to GTL technology, given their vast gas resources, a need to diversify end product revenues, or infrastructure constraints, include Russia, Central Asia, the Middle East (unlikely in medium term), North Africa and South East Asia, based on conventional reserves. Unconventional gas (tight gas, shale gas and coal bed methane) has transformed the supply/demand landscape. Accordingly, we also see the US, Canada, Indonesia, Australia and Brazil as locations for future GTL projects.

The potential for a gas acquisition or feedstock partnership, focused on the North American market, results from the recent shale gas influence on gas prices and an active M&A market. Recent benchmark transactions have been priced between US$0.2/mmBtu and US$0.9/mmBtu on a total resource basis at an average cost of c.US$0.6/mmBtu, within the range of Sasol's funding capabilities, effectively removing the existing feedstock constraint.

Sasol's un-geared balance sheet, coupled with strong expected cash flow generation, allows various combinations of securing significant feedstock (3tcf) and funding additional attributable (c.50,000bbl/b) capacity, without compromising currently proposed growth projects (China CTL and Uzbekistan GTL).

Eoin Treacy's view How would you describe a company with low gearing, excellent growth potential, in a sector which has received very little attention since the credit crisis and that is breaking out of a relatively lengthy base? Certainly worth a second look. The Oil/Natural Gas ratio remains at elevated levels and with oil prices remaining close to the upper side of their yearlong range, the outlook for gas to liquids looks positive.

Sasol more than halved in 2008 and built a base mostly below ZAR31,200 until early October when it broke upwards. It held the gain admirably and hit a new recovery high on Monday. A sustained move below ZAR32,000 would now be required to question medium-term recovery potential.

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