Cannon Asset Managers: Sasol – Is it worth topping up?

By Cannon Asset Managers

Given Sasol’s recent fall, is it worth topping up at these levels?


There is a very high degree of correlation (0.96) between Sasol’s share price (in green) and the Rand oil price (in black). Given the current Rand-oil price, Sasol could fall even further, to as low as 25000 cps based on the established correlation.

Does this mean that Sasol isn’t worth buying at the current price? – No.

At 25000 cps a share, the assumption is that the current oil price is sustainable and will stay at these levels. A better way to determine a sustainable or realistic oil price is to look at the five year futures price which is not nearly as volatile as the spot price. The current futures price of $72/bl is the price paid for secured delivery five years from now. Using the futures price and the current exchange rate yields an implied value of 39800 cps per share, just above where Sasol is trading now. Our inference from this is that the market is taking the view that the futures price is more realistic than the spot price.

The lowest cost oil producer – which is Saudi Arabia at $10/bl – could continue to squeeze out marginal producers for some time. But the futures market implies equilibrium will likely be found at higher levels.

Any imminent view on Sasol should therefore be informed by an assessment of the sustainable oil price. Given this position, Sasol is fairly valued at 40000 cps.Sasol - Cannon

Our View

The key number to assist in determining a longer-term fair value for Sasol is the futures price rather than the spot price. Whilst the spot price drives near-term sentiment and suggests more downside pressure fair value is better guided by the future price of oil. Therefore, further price weakness may present a medium-term buying opportunity given the current future price.

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