|
Published: December 14, 2009
The clock is ticking.
We don't have much time.
That's not just the opening line of the upcoming season of "24,"
it's the statistical reality of the world's petroleum reserves.
Fact: The world consumes 80 million barrels of oil every day.
Fact: There are 1.3 trillion barrels of proven oil reserves.
Fact: At the present rate of consumption, we will run out of oil
in 40 years. And that's presuming that every barrel of proven
reserve is recoverable (unlikely) and that demand doesn't rise
(extremely unlikely).
Many oil-industry experts say demand will begin to eclipse
new-found supply in just a few years.
What's going to happen? Well, check the highlight reel. We've
already had a glimpse of what the rising demand for oil can do
to crude's price. Oil was $10 a barrel in 1998. From that low
ebb the price started to rise, then soar. It eventually crested
at $147 in 2008. Now, while prices have fallen back to about $70
per barrel today -- as a result of lax demand in a recession,
not a profusion of new finds -- the laws of supply and demand
that drove oil to its high are likely to begin to push prices
higher as the world's economies recover.
Even setting aside the economic reality, the political climate
vis-à-vis oil has evolved. The environmental movement, once a
collection of loons on the fringes of the political spectrum,
has become a mainstream concern, one that's drawing
international attention right now in Copenhagen. Climate-change
legislation and emissions control will incentivize companies to
look for alternative sources of energy. These economic and
political factors will converge, making oil more expensive and
generating huge demand for alternative sources.
Sasol Ltd. (NYSE: SSL) is a South African energy and
chemical company that uses coal-to-liquids and gas-to-liquids
technology to convert low-cost coal and natural gas into higher
value liquid fuels like gasoline, diesel fuel, jet fuel and
petrochemicals.
Our
StreetAuthority Market Advisor readers first learned of
Sasol in January of 2007. We singled it out as a company that
would benefit from increasingly strict government pollution
controls. A year later it was up +42.2%.
The company mines coal in South Africa and produces natural gas
in Mozambique. It processes the material through fuels plants in
South Africa. Sasol also refines imported crude into gasoline,
diesel and jet fuel. The company basically turns cheap coal and
gas into high-value liquid fuels and chemicals.
The company has grown earnings at more than +17% per year on
average for the past five years. Sasol achieved a compound
annual growth rate in operating profits through fiscal 2008 of
39% per year. Sasol's shares have averaged a superior +19% total
annual return for the past 10 years. The S&P 500 Index's
performance was negative for the same period.
Sasol's growth prospects are the most intriguing. Sasol is
aggressively expanding its main plant in Secunda and growing its
international presence at the same time. As one of the world's
few existing players in gas-to-liquid and coal-to-liquid
technology, the company is on the short list of suitable
partners for other energy companies wishing to establish the
technology.
The world's biggest emitters of CO2 are automobiles (40%) and
coal-fired electric plants (35%). Gas-to-liquids produce
cleaner-burning diesel fuel for transportation. The
coal-to-gasoline technology has huge possibilities in the United
States and China, both of which have hundreds of years' worth of
coal reserves.
Sasol has already formed a partnership with Chevron (NYSE:
CVX) to develop a gas-to-liquids plant in Nigeria, and
Sasol's coal-to-liquids technology has massive potential in
China. China has largely powered its massive industrial
expansion with dirty coal and is desperately trying to clean up
its pollution and become more energy efficient. Sasol is
collaborating with Chinese joint-venture partners for several
projects there. The company also has already launched projects
in Iran and India.
That said, profits have significantly diminished during the past
year, as lower fuel prices squeeze margins. Sasol's average
price of oil in the fiscal year ended June 30 was $68.13 per
barrel versus an average of $95.51 for the year before. Chemical
prices have also fallen off a cliff from 2008 levels. As a
result, net income for the company has fallen more than -40%
from fiscal 2008 levels, to about $1.7 billion.
But things are turning around. Oil prices have rebounded. The
world's economies are recovering. Given those two factors, many
predict the price of oil will see further increases. Investment
bank Goldman Sachs (NYSE: GS), for instance, predicts oil
prices will reach $90 in 2010 and $110 in 2011.
Higher prices will mean increased earnings which typically
translate into a higher stock price, as well as more generous
dividends. The company pays dividends twice a year; they
fluctuate with earnings. Sasol paid $1.05 per share in calendar
2009 for a trailing yield of 2.7%, however, the company paid
annual dividends of $1.60 in 2008 when earnings were higher. The
2009 dividend marked the first time since its listing in 1979
the year-over-year dividend was reduced.
The company has a solid balance sheet with more cash than debt,
$19 million versus $18 million respectively. The solid balance
sheet is a testament to the strength of the company's business
model and Sasol is fully capable of pursuing growth
opportunities.
The stock still sells at just 13 times trailing earnings,
compared to an average of 22 times for the S&P 500. This company
could benefit in a huge way from the worldwide energy situation
in future years. The current recession and lower fuel and
chemical prices have presented an excellent entry point for
Sasol.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
