At 2:15pm yesterday, a part-owner of the company sold their Sasol shares for just R24 each. At that price this shareholder valued the entire oil-from-coal and chemicals business as worth less than $1bn. Such is the insanity of a time where, as David Shapiro told us on Rational Radio this week, people are “throwing away their assets.”
For context on that $926m valuation: in the financial year to end June 2019 Sasol’s free cash flow was $1.2bn and pretax profit $550m. I’m deliberately using US dollars to be conservative – in truth, the plunging Rand is a very useful shield for a business where the lion’s share of its $12bn in revenue is based on the Rand price of oil.
Some sanity did return to the marketplace as Sasol’s price recovered to R34 a share at yesterday’s close. But only a little, because that is almost the same as the company’s per share earnings in the 2017 financial year.
Mr Market’s deep depression flows from a continued slide in the oil price, which hit $25 a barrel – a level at which Sasol’s CEO says said this week the company would still generate a profit. The shares, however, are now being priced for an even lower oil price.
Given the Coronavirus panic, further oil weakness is possible. But it is also unsustainable. Around half the US’s oil consumption is from shale gas which costs an average of $60 a barrel to produce. Like any other commodity, the cure for a low oil price is a low oil price. Appreciate this and you won’t join the asset chucking madness.
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