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Gold/Mining/Energy : Gasification Technologies

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From: Lynn	5/20/2008 7:34:05 AM
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Flash: Sasol Ltd (SOLJ.J): The Diesel Train is Not Running Out of Steam (C) 19 May 2008 - 8 pages * Diesel Consumption Continues to Grow - SAPIA released fuel consumption numbers for 1Q2008 today. White product consumption grew by 3.4% (YoY) driven by diesel (+9.5%) and jet fuel (+3.3%). Petrol and illuminating paraffin contracted by 0.9% and 3.5% respectively (Figures 1 and 2). * Around Half of Sasol's Production is Diesel - South African fuel consumption has tilted towards the middle distillates and currently around 52% of white product consumption is made up by diesel, jet fuel and paraffin. We calculate that in FY08 around 48% of Sasol's refined product production (Synfuels and Natref) will be diesel and jet fuel. Sasol's middle distillate production will grow to 56% when Oryx runs at full production. * Logistics Remain Constrained - We remain concerned that rapid growth in fuel consumption will continue to strain the distribution network and we calculate that significant additions to road and rail capacity will be required when Sasol's Project Turbo runs at full capacity (FY09-). * Sasol's Implied Diesel Crack at Record Level - Sasol's implied refining margin is currently at US$25.50/bbl, close to an all-time high. The margin has been driven largely by strong diesel cracks which are currently at US$46.44/bbl. The long-term average diesel crack is at US$10.73/bbl. The current spot margin is 80% higher than the average so far achieved for FY08 (Figure 3). * Low Sulphur Diesel Even Higher - We generally use 500ppm diesel as a benchmark for Sasol's diesel prices but highlight that low sulphur diesels are trading at an even higher premium (US$6-7/bbl over heating oil). The Oryx plant produces diesel that contains now sulphur, which could command an even higher premium (Figure 4). [snip] * Sasol has an Advantaged Product Mix - Sasol's operations produce a minimum of fuel oil, which currently has a negative crack spread (Figure 5). As a result, Sasol's refining margin currently trades at a US$15/bbl premium to a benchmark Singaporean cracking margin (Figure 6). * Upside to FY09 Earnings - We currently assume a diesel crack of US$20.30/bbl for Sasol's FY09E (US$25.86/bbl for FY08). Our FY09E assumption is more than US$20/bbl (56%) below the current crack of US$46.44/bbl. We calculate that in FY09E, a US$10/bbl increase in the diesel crack would lift Sasol's earnings by R2.00 per share (+3.5%). * Upside from Pipeline Levies- - We also note that Petronet has applied to the regulator (NERSA) for increases in the pipeline tariff (15% per annum for the next three years). This is required to fund the new pipeline that is in the planning stages. If the price increases are achieved, Sasol will be able to increase its inland petrol price to oil companies by the same amount, which would increase EBIT by around R1.1bn over the next three years. Sasol charges inland import parity for products - the more it costs to transport product the higher the price they can achieve... ...it costs around 14c/l in the pipeline and close to 30c/l in a road truck * Fuel Levy added - In May an additional levy of R15/m3 levy was added to inland fuel prices to compensate oil companies for transporting fuel inland by road and/or rail. Sasol should also be able to increase its inland selling price by this amount which should add around R100m per year to EBIT. Despite this increase, we still calculate that oil companies would make a loss on product transported by road and rail and we estimate that a 6-7c/l increase would be required to offset high road transport costs. * Fuel Prices to Increase More - CEF currently shows a 25c/l under recovery on petrol and a 40c/l under recovery on diesel. Fuel prices are set to increase again in June. * Upside firmly in place - We believe there remains significant upside to our FY09 earnings forecasts as well as our valuation and maintain our Buy/Low Risk (1L) rating on Sasol.

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