“The U.S. Defense Department has already tested this new-age biofuel in its B-52 bomber fleet… “

By Travis Johnson, Stock Gumshoe, April 15, 2013

We’ve gotten a bunch of questions recently about this pitch from Nathan Slaughter about gas to liquids technology and the “death of OPEC,” so I’m sharing an excerpt from the Friday File article about this teaser that we published a little over three weeks ago for the Irregulars.

Don’t worry, it’s the meat of the article — I didn’t leave out the tickers or any of my comments on this particular stock, I just left out the comments about a few other stocks I cover for the Irregulars and about my personal portfolio. I still don’t own any of the stocks mentioned below, for full disclosure, and haven’t traded any of them in the three weeks since I wrote the piece.

So … what follows was originally published on March 22. It has not been updated or edited.

“This 68-year-old Disruptive Energy Technology Could Mark the End of OPEC as we Know it.”

There have been more than a few ads that talk about the “end of OPEC” — from the “Eagle Diesel” pitches made by Frank Curzio for the natural gas-driven transportation revolution, to the more misguided love affairs with geothermal energy in years past, but this one is a bit different … and, for a change, it focuses on an inexpensive, profitable and dividend-paying company.

So I thought it was worth taking a look for you in this week’s Friday File (we’ve also got a few updates on stocks we’ve covered in the past, including Lonrho and Invensense — those are down at the bottom).

This particular ad comes in for the Scarcity & Real Wealth letter from StreetAuthority, edited by Nathan Slaughter … so how does Slaughter catch our attention?

Well, here’s the intro to the ad:

“The U.S. Defense Department has already tested this new-age biofuel in its B-52 bomber fleet, while one major airline has already locked in a 10-year supply.

Forbes calls this development ‘a small but significant step forward in sustainable aviation.’

“The Wall Street Journal says, ‘Early adopters will make the most money.’

“You’ll call this the most profitable investment idea for 2013.

“If you can get in now — before this technology is rolled out in the U.S. — you could easily turn a $5,000 investment into $50,000 in the next five years but double that again when it’s licensed to China.”

So that sounds nice, right? Slaughter goes on to talk about the huge impact that fracking has had on natural gas prices, and says that this next step — which is dependent on those low nat gas prices — will help drive down the cost of gasoline and diesel fuel. And, of course, help make us rich in the process. He says he has two goals:

“1. To tell you about a “new” 68-year-old gas-to-liquids (GTL) disruptive energy technology that America’s glut of natural gas has made commercially profitable, and

“2. To explain how you can get in on this incredible wealth-building opportunity before licensing of the gas-to-liquids technology around the world begins and the company’s stock price doubles….

“I know how preposterous it may sound that GTL technology could be more profitable than fracking.

“But not when you fully understand how falling natural gas prices make it possible for GTL technology to profitably produce a barrel of diesel fuel for $66 — compared to $124 from crude oil… then you can begin to see the profit opportunities staring you in the face.

“Especially now with natural gas prices hitting their lowest point in 35 years as the fracking boom spreads around the world, more shale reserves are tapped, and more natural gas floods into the market.

“And that’s just the beginning.

“With natural gas prices at record lows, this breakthrough technology has the ability to recapture — hold on to your hat — billions of cubic feet of natural gas that’s burned off from venting at oil wells.

“Do you realize what this means?

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“This company is sitting on technology that when fully realized could be worth hundreds of millions of dollars by capturing the vented and burned natural gas from oil wells around the world and turning it millions of barrels of diesel fuel.”

So … which stock is he touting? We get some more clues here:

“The company is in the process of developing two North American GTL conversion plants right in the heart of America’s natural gas industry, adding to its flagship Qatari and South African operations.

“When its new plants come online in the next few years, we foresee a 100% rise in its stock price to be just the beginning.

“That’s because the company’s natural gas conversion plants develop not only ultralow-emission diesel but also ultralow-emission jet fuel as well — which the U.S. Air Force has already tested and locked in a 10-year supply of.”

OK, so that “South Africa and Qatar” bit is probably too much of a hint — you might be guessing at the company already from just that, and you’re probably right — but we do get a few more clues just to make sure we’ve got the pick identified:

“Simply put, GTL is a chemical process the German military pioneered in WWII to convert coal to synthetic fuels. Developed by Franz Fischer and Hans Tropsch, this technology produced 124,000 barrels of synthetic fuels daily at 25 plants in 1944.

“Without getting too technical, the Fischer-Tropsch process creates synthetic fuel from coal and natural gas just like an oil refinery turns crude oil into petroleum, gasoline, and diesel fuel — only the process is much different and more expensive.

“That’s why this technology was largely ignored 68 years ago, except in South Africa, where the country depended on GTL technology to meet the its energy needs during the apartheid years.

“For these reasons, South African engineers continually worked to improve on this technology to bring costs down. Thanks to the falling price of natural gas, this company can profitably produce a barrel of diesel fuel for $66 a barrel! That’s a whopping 80% lower than oil-produced diesel’s production cost of $124 a barrel.

“As a result, this proven technology produces nearly 1 million barrels of diesel fuel a day — and at a significant savings in the countries where it is now in operation….

“As The New York Times recently reported, this technology can ‘produce diesel fuel that burns cleaner, costs less and creates less greenhouse gas pollution than fuel derived from crude oil.'”

So who is it?

As you may have guessed, the Thinkolator confirms that the stock being teased here is Sasol (SSL), the South African company that has been the major mass-scale user of the Fischer-Tropsch process for many years — mostly because South Africa had trouble getting oil imports during the Apartheid years when they were global pariahs, but they had (and have) plenty of coal to turn into liquid fuel and petrochemicals. Sasol was a major market darling during the last oil run-up, from the early 2000s until the crash in 2008, but has not participated much in the recovery and sustainably high ($80+) oil prices over the last four years.

They did have a rough patch in 2008-2009, when their share price was cut in half along with most other companies’ and they cut the dividend, but since then they’ve instituted a “progressive dividend” policy — which basically seems to mean that they’ll continue to raise the dividend as long as their earnings rise and their balance sheet permits. Which ain’t exactly a promise, but they have raised the payout by 15-20% a year over the last three years and the trailing dividend is now almost exactly 5%, and it represents a payout ratio of not much more than 50%, so there should be plenty of room to raise it if they want to. (Payout ratio is just the percentage of earnings that are paid out as dividends — the trailing twelve months saw earnings of about $4.10 and a dividend of $2.19.)

And Sasol has been active around the world in setting up various unconventional refineries — including a huge one in Qatar that is the standard-bearer for those who think GTL is going to be a meaningful driver for the refined products industry. Qatar is the home of the cheapest natural gas in the world, and a wealthy government willing to partner with outside companies, so if it can’t work there it won’t work anywhere.

But even in Qatar it ain’t cheap — building these refineries is at least twice as expensive as building comparable crude oil refineries, so you really, really need the oil/gas differential to remain skewed, as it has been for a few years now, for this to work out. The economics of GTL mean that natural gas has to stay low, and crude oil has to stay high.

The New York Times article that Slaughter cites