“The Death of Electric Cars” — Oxford Club says you can make a fortune on “The Next Exxon”

by Travis Johnson, Stock Gumshoe | March 23, 2016 1:01 am

Oxford Club says this "little-known company" and its "miracle of science" could do away with electric cars -- what is it?

I wrote an article about a similar pitch from the Oxford Club[1] folks a couple years ago, back when it was not just the “death of electric cars” that was being promised, but a way to make gasoline “three times cheaper” without using oil[2].

But I figured that this new ad must be talking about something a little different, despite the similarities, so I thought I’d take a closer look for you. The pitch is from Sean Brodrick[3], who helms the Oxford Resource Explorer[4] newsletter, and he says this “How to Make a Fortune on ‘The Next Exxon'” report will lead you straight to profits… in his words, “getting in now could soon hand you 53% in weeks… 165% in months… 633% in years… and more….”

Man, that “Next Exxon” bit sounds very similar to the promise he made back in the Summer of 2014, too –though back then it was “Early Investors Could Make 90.5%… 281.9%… And Even 1,063% in a Few Years….” Though that stock, which was recommended almost exactly at the recent peak in oil prices back in July, 2014, is now down about 46% from where it was then.

Am I sounding mysterious enough yet?

OK, here’s the opening of the spiel…

“Maybe once every century we see a technology breakthrough that completely transforms the world…

“And I believe we’re about to witness one of these rare events right now.

“It’s an event that could completely wipe out the electric car industry…

“And, at the same time, hand a clued-in group of investors gains of up to 633% in the coming 18 months.

“Not many understand the scale of what’s about to happen…

“But it’s going to begin with a little-known energy company working deep within the Louisiana Bayou.”

Other than that “electric cars” bit, that is sounding more and more familiar.

Here’s the “sum up” of Brodrick’s tease so we can jump ahead a bit:

“In my “How to Make a Fortune on ‘The Next Exxon’” report, you’ll discover…

• The name of this little-known company that creates real gasoline from natural gas[5]… three times cheaper and 40% cleaner than the “oil to gasoline” method.
• How it could sell this gasoline for as little as $0.58 a gallon and still be profitable.
• How it’ll soon create enough gasoline to fuel 10.3 million American cars a year… and ramp up to 20 million and beyond…
• How its technology, 372 patents, 120 scientists and locked-in monopoly on the ‘natural gas to gasoline’ process will give it a competitive advantage for years to come…”

Seriously? Yes, it seems that Brodrick is still pitching this same “natural gas to gasoline” company, Sasol (SSL)[6].

So yes, this remains one of the more egregiously misleading ads around — I thought it was bad enough that they were still sending out the ad unchanged last Fall, when I re-checked that “get real gasoline without oil for $0.58 a gallon” pitch[7], because the story had changed so dramatically in the year following that ad’s introduction… but now it’s even more ridiculous.

Unless, of course, oil takes off again and natural gas stays cheap, and Sasol re-starts their big but still conceptual “gas to liquids” project in Louisiana and it goes off without a hitch and is super-profitable in four or five years. Which might be possible, but isn’t in my “likely” category at the moment.

For those of you who don’t know the full story, I should backtrack a little here. Sasol is a big South African energy company, and they have probably worked more on fine-tuning and improving the Fischer–Tropsch process for creating synthetic liquid fuel from coal[8] and natural gas than anyone else in the last 75 years — in a sense, that’s because Nazi Germany, which was the previous champion of Fischer-Tropsch, and Apartheid-era South Africa had some things in common aside from the obvious horrors: They had lots of coal; and no one wanted to sell them any oil.

The process itself is pretty well understood and has been used by lots of companies — it’s not patented (the basic process is 90 years old), though there are patents on some of the specific processes, improvements and equipment used by most of the major gas to liquids plants (including the world’s largest, which is run by Shell in Qatar using a proprietary reactor system that’s different from Sasol’s). Sasol’s uniqueness, apparently, is in their reactor design, which (this is oversimplifying, sorry) uses heat, pressure, and cobalt[9] as a catalyst to turn natural gas into liquid fuel.

And Sean Brodrick persists in telling us that this company could “hand you 53% in weeks” because of this ability to “create real gasoline from natural gas” … more from the ad:

“As you’ll read in a few moments, its American plant is already in the works…

“A plant designed from the ground up to reduce the production costs of gasoline and fuel 10 million American vehicles per year.

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“I’ll get into the details on this plant and why it’s going to result in an enormous surge in share price here shortly…

“Soon, it will distribute this ultra-cheap gasoline all across America…

“As I write this, trucks are clearing land for a plant to come online just months from now.

“People driving by can’t imagine the scale of what’s going to go on here.

“Covering 650 acres… it will rise out of a Gulf Coast bayou… with direct access to the massive natural gas fields pumping out record amounts of natural gas across Texas and the rest of the U.S.”

That implies a plant that will be selling cheap gasoline (actually, diesel in this case) soon… right? And he says that “a company executive let slip in an overseas newspaper that its plant is designed to be profitable at $25 a barrel”… which also seems to indicate that it should be “full speed ahead,” right? After all, oil did dip to maybe $28 or so a few weeks ago, but bounced right back and is in the $35-40 range now.

Except… Sasol canceled work on this plant well over a year ago and said the project was “delayed” because oil had fallen from $100 to $50 or so. Delayed as in stopped, as in they’re not investing in building this $11-14 billion massive gas-to-liquids refinery on their 650 acres near the Gulf coast and cheap natural gas supplies in Louisiana.

Now, Sasol is building something in Louisiana — that gas to liquids project, which is what he’s talking about and which is designed to turn natural gas into diesel fuel and similar refined liquids, is on hold… but they are also building a large ethane cracker at the same site, and that part of the project (which is slightly less expensive, about $8 billion expected capital investment) is apparently still proceeding (though a little slower than anticipated). That cracker complex, which is part of a big chemical complex that Sasol already had in the area, won’t have anything to do with gasoline prices, this is a plant that will create ethane from natural gas, which will then be used as an ethylene feedstock for various products (detergents, synthetic fabrics, film, etc.) That cracker broke ground last Spring, and is expected to be producing in 2019 sometime (delayed from 2018) — and ethylene prices are, apparently, much more stable than diesel fuel prices.

The company has been pretty consistent about saying that a oil-to-natural-gas price ratio of about 16:1 is the minimum for their gas-to-liquids (GTL) process to be cost-effective, and we’re still in that window — but when the project was first moving forward in the design phase in 2012, the ratio was more like 40:1. Here’s that ratio put on a chart, so you can see where the relative pricing has been over the last 20 or so years:

You can see that it’s been below 16 for at least as long as it’s been above it, though you can also see why the idea of investing in the differential between natural gas and oil was such a hot idea from 2009 into 2012 when that ratio was inexorably climbing… that’s also what got so many folks excited about the natural gas engine and fueling companies (Westport and Clean Energy Fuels, among others) — it seemed magical that natural gas was falling so fast but oil and gasoline prices were staying relatively higher, mostly because natural gas is so much more expensive to transport overseas than crude oil.

As an aside, that’s also when a fire was lit under the idea of liquefied natural gas (LNG) exports as a way to profit from the gap between US natural gas prices, newly cratered by explosive increases in shale gas production, and high LNG natural gas import prices in fuel-deprived areas like Europe, Japan[10] and South Korea[11]. There was a lot of money invested based on theories about where this oil/nat gas ratio or Henry Hub/LNG ratio might be in the future, and betting on broad price differentials like that is inherently risky.

Like Sasol’s mega project, LNG plants cost many billions of dollars and take forever to build — the first export facilities are finally operating now in the US, but everyone’s warily watching the price differentials there, too, as Japan’s import price for LNG has fallen by 50% since 2012, when Cheniere’s Sabine Pass LNG Export Facility broke ground (the US price, the Henry Hub nat gas price, has also fallen by about 50%). I mention that mostly because Cheniere (ticker LNG) was teased by this same newsletter about four months ago (that was a pitch from Dave Fessler which I wrote about here[12], Fessler also works on the Oxford Resource Explorer — Cheniere is down about 20% from when that pitch came out, though Chenier’s Sabine Pass MLP (CQP), which owns that first export project, is about flat)

Most of us just didn’t see, I guess, that the inexorable decline in natural gas prices following the “shale gas” revolution was going to mirrored by a similar move down in oil prices as US oil production exploded… probably because no one worried that we’d see an oil glut, because oil is so much more fungible on world markets (because of much cheaper and more available shipping infrastructure), and China[13] would keep buying more cars and surely OPEC would maintain some price controls… right?

Not so much. The Saudi’s opted not to bail US producers out, hoping that if they kept production up and drove prices down to the $30s everyone would give up and put their fracking[14] toys away and go home (driving heavy duty pickup trucks, hopefully, at high and inefficient speeds). Perhaps we’ve found some equilibrium now, with oil bouncing back a bit after a horrible few months, but I have no idea where the price is going — I am fairly confident, however, that all the oil found but not produced at $40 means we’ll see a lot more supply come online at, say, $60 or so as desperate drillers look to increase production rapidly so they can pay their bills. It seems unlikely, absent a big shock, that oil will be back at $100 anytime soon.

Which means that natural gas has to stay really, really cheap for big GTL projects to make sense — and it is, at least, awfully cheap right now. Sasol doesn’t have $14 billion to throw at a project in the hopes that they might breakeven in ten years — and they don’t necessarily own a cheap natural gas supply (like Shell reportedly does in Qatar) that can keep them going if oil prices are volatile, so their planning must depend on their guesses about future gas and oil prices… and while their recent comments about pricing are conservative, there’s no what to know how or when they’ll make a decision to go ahead with their big plant in Louisiana.

It does not appear that the WTI Crude/Henry Hub natural gas ratio of 15-25 that we’ve seen over the past year is enough to make Sasol eager to put a shovel into the ground — as far as I can tell they’ve made no decisions on the project since January of 2015, when the CEO said the delay “will allow us to evaluate the possibility of phasing in the project in the most pragmatic and effective manner.” (that CEO, David Constable, is leaving the company in May, just FYI.)

When this ad was first circulating in the Summer of 2014, I wasn’t all that worried about the price of oil having a huge impact on Sasol’s plans — I was more worried about the fact that we’re talking about a $14 billion project, and there are only a few of these facilities in the world (all of which seem to have gone way, way over budget and taken far longer than expected to build)… and the fact that even if the project works and is on schedule, it would take several years before they actually got it built and produced any diesel from natural gas. That’s still a concern, assuming that they do eventually build this thing.

And that, presumably, is what Brodrick thinks will happen soon — in a follow-up email to the original ad this is what he says:

“Remember: This ‘gasoline without oil’ company is poised to fuel 10.3 million U.S. vehicles a year…

“With $0.58 gasoline.

“I’d like to give you a quick reminder of where we stand at this very moment:

“I expect this ‘gasoline without oil’ company’s executives to make a series of announcements about their U.S. ‘gasoline without oil’ plant soon.

“The buzz from their press releases alone… not to mention the news coverage… could easily send the stock up 90.5% quickly and triple it soon after.”

So I guess he’s betting on the idea that Sasol will announce that they’re restarting development of the plant to at least some degree, and that investors will be ecstatic. If it does get built, it would presumably take at least 3-4 years, probably longer, but it appears that Brodrick thinks we’ll see the market immediately react with excitement to the plan.

I’d counter with the reminder that this is a large company, with a market cap of about $20 billion and major operations in several countries… and that the impact of the Louisiana GTL project wasn’t that obvious on the share price back when that project was expected to be built and operational in 2018 or 2019. From 2012, when they started the engineering and design work, until January 2015, when they put it on hold because of falling oil prices, the share price of SSL went from the mid-40s to a high of about $60 when oil peaked in price in the Summer of 2014, then dropped with falling oil prices and was back below $40 a share before they announced that the Louisiana project was on hold.

If the stock rose by 90%, that would put it back right around Sasol’s all-time highs in the neighborhood of $60 a share. Sasol is a little bit unusual because of its focus on alternative technologies like their GTL process, but the stock still tends to move in line with oil prices and with other big energy companies — here’s a five-year chart of Sasol and WTI crude oil:

That doesn’t mean Sasol can’t go up by 90% — it has had good runs before, though the last time it really outperformed the energy sector was in 2003-2006 or so when they were first emerging as a global player trying to grow beyond South Africa (they began to trade on the NYSE in 2003, which was part of raising their profile). But I suspect that if Sasol does go up by 90%, that means oil is going to be probably at least $70 a barrel… which means a lot of other energy stocks will also do fantastically well. I suppose it’s possible that the market would get excited about a flurry of press releases about the Louisiana GTL plant getting the green light or getting financing, and maybe the stock will soar, I don’t know… but I’m pretty skeptical on that front.

And, of course, the most recent news out of Sasol has not been about speeding their capital expenditures… but about cutting costs and delaying projects further, like the announcement a few weeks ago [15]that the ethane cracker part of the Louisiana project that is still being developed will now likely be completed in 2019 instead of 2018. Sasol is clearly planning for oil prices to be “lower for longer,” and I’d say they seem, from reading their press releases (like the recent quarterly report here from a couple weeks ago[16]) to be hunkered down in “cost containment mode”… not nearly as desperate as the midsize oil producers who are panicking and in “survival mode,” but not necessarily primed for growth, expansion and big capital projects, either.

If we ignore the possible impact of the massive on-hold capital investment in GTL expansion either in Louisiana or at their smaller Qatar plant, and just look at their current operations, Sasol has held up relatively well despite the decline in oil prices — it’s still profitable, with a trailing PE of about 14, and it’s down from its highs… but not down nearly as much as some energy companies. I see just two analyst estimates for SSL, and the average of the two has earnings falling dramatically in the current year (which ends in June) to about $1.29, then recovering a bit in FY2017 to $2.30, with earnings growth in the low single digits after that. That means the stock is trading with a forward PE (based on FY17) of about 13. Obviously, analyst estimates depend heavily on whatever that analyst thinks will happen to energy prices.

There doesn’t seem to be much enthusiasm about the shares outside of Sean Brodrick’s office, from what I can tell, so he is at least being a bit contrarian now (though his similar push for the same stock at $58 in 2014 was, of course, the very opposite of contrarian). Analysts have been downgrading Sasol in recent weeks, and their debt has come under watch for a possible downgrade (though it will still probably be pretty highly rated, they don’t have that much debt relative to their cash and assets — the balance sheet isn’t really what worries me about SSL). I guess I’d probably be inclined to consider buying Sasol over Tesla… but that’s more because of my fear of Tesla’s valuation than it is the notion that Sasol will “kill the electric car.” I’m pretty happy that I don’t have to own either at this point.

So there you have it — yes, it’s still the same old pitch for Sasol and their possible big GTL project in Louisiana, and I still think you’ll have plenty of time to digest the news if they do indeed decide to go forward with that project. And if you’re throwing around numbers like “SSL will go up by 90% this year” or “triple soon after” well, I’ll happily take the “under” on that bet, and I suspect that Sasol’s performance over the next few years will probably be good if oil goes up, and bad if oil stays flat or goes down, much like lots of other energy companies. What say you? Any interest in Sasol or the other stocks that need a big gas-to-oil price ratio to thrive? Let us know with a comment below.

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