Sasol on 27 February 2017, released its interim results for the six months ended 31 December 2016.
Earnings attributable to shareholders for the six months ended 31 December 2016 increased by 19% to ZAR8.7 billion from ZAR7.3 billion in the prior period.
Headline earnings per share (HEPS) decreased by 38% to ZAR15.12 and earnings per share (EPS) increased by 19% to ZAR14.21 compared to the prior period.
Operating profit decreased by 8% to ZAR13.7 billion compared to the prior period. An interim gross cash dividend of South African 480.00 cents per ordinary share (31 December 2015 – 570,00 cents per ordinary share) has been declared for the six months ended 31 December 2016.
Although business performance was mostly in line with our expectations, Sasol’s profitability, period on period, and as reflected in HEPS, was negatively impacted by the following items:
The strengthening of the Rand against the US dollar to ZAR13.74 at 31 December 2016 (30 June 2016: ZAR14.71) resulted in translation losses of approximately ZAR1.3 billion on the valuation of the balance sheet, compared to translation gains of ZAR2.6 billion in the prior period (including foreign exchange contracts). The valuation impact of the stronger closing exchange rate for the period under review negatively impacted earnings by approximately ZAR1.46 per share.
The impact of the once-off prolonged strike action at our Secunda mining operations resulted in an additional net cost of ZAR1 billion or ZAR1.06 per share.
The reversal of a provision of ZAR2.3 billion (US$166 million) or ZAR3.77 per share in the prior period based on a favourable ruling received from the Tax Appeal Tribunal in Nigeria relating to the Escravos Gas-to-Liquids (EGTL) project.
HEPS, normalised for these once-off adjustments and translation effects, amounted to ZAR18.62 per share, which is 4% higher compared to normalised HEPS for the prior period of ZAR17.96.
“Notwithstanding the volatile macro-economic environment in which we operate, Sasol delivered a resilient performance. This is attributable to our continued sharpened focus on business and capital excellence, advancement of our value-based capital projects, consistent delivery against our cost reduction and cash savings targets and a heightened focus on macro-economic risk mitigations to protect our balance sheet. These decisive actions were underpinned by a robust business performance from our global assets. Furthermore, we continue pursuing our zero harm focus, building a resilient organisation for the future and nurturing our foundation business, while driving value based growth as we consider our future investment opportunities,” says Bongani Nqwababa, Sasol Joint President and Chief Executive Officer.
“Advancing our value based growth strategy continues through our near-term focus on Southern Africa and North America. Our Lake Charles Chemicals Project in the United States is now 64% complete, and remains on track for start-up of the first units in the second half of 2018. The fundamental drivers for this investment remain sound, and will enable Sasol’s continued growth in a low feedstock cost region. In Mozambique, we remain committed to our growth plans and will continue to partner with the country’s government and other stakeholders on projects that will help stimulate socio-economic growth. We are confident that the economics to develop the Production Sharing Agreement license area remain positive, with four wells completed, as part of our drilling campaign, already showing promising results,” says Stephen Cornell, Sasol Joint President and Chief Executive Officer.
Business performance in Energy and Chemicals businesses
Overall, Sasol delivered a strong business performance across most of the value chain. Secunda Synfuels’ production volumes increased by 1% and our Eurasian operations increased production volumes by 5% on the back of stronger demand. Natref’s production volumes were down 7% mainly due to plant shutdowns during the period under review.
Normalised sales volumes increased by 11% for our Base Chemicals business and 2% for our Performance Chemicals business compared to the prior period mainly on the back of stronger demand and improved plant stability.
Liquid fuels sales volumes decreased by 2% due to the Natref planned shutdowns and more volumes from Secunda Synfuels Operations (SSO) being allocated to the higher margin yielding chemical businesses.
ORYX GTL achieved an average utilisation rate of 95% with the run-rate of production in line with our previous market guidance.
Sasol’s Secunda mining operations experienced a challenging six months with the onset of a protected strike action, which commenced in August 2016, by the Association of Mineworkers and Construction Union (AMCU).
Notwithstanding a 16% decrease in mining production volumes resulting from the strike action, Mining continued to deliver our full coal supply commitment to the integrated Sasol value chain through external coal purchases and increased gas consumption at Secunda Synfuels Operations. The profitability of the mining business was significantly impacted by the R1 billion net additional cost as a result of the strike.
Cost discipline enhancing resilience
Sasol continued to drive our cost containment programme and managed cash fixed costs well below inflation in nominal terms, when compared to the prior period. Excluding the impact of inflation, our cash fixed costs, including the mining strike costs, reduced by 1% in real terms compared to the prior period. The strong cost performance was achieved by sustainable delivery of our Business Performance Enhancement Programme (BPEP) and Response Plan (RP).
As part of the BPEP, we delivered sustainable cost savings of ZAR4.9 billion, exceeding our December 2016 exit run rate target by ZAR0.2 billion. We are confident that we will meet or exceed our targeted sustainable savings at an exit run rate of ZAR5.4 billion by the end of 2018.
Our comprehensive low oil price RP, focusing on cash conservation to counter a lower-for-much-longer oil price reality, has continued to yield positive cash savings in line with our 2017 targets, despite margin contraction and difficulties experienced in placing certain product. The RP realised R17.8 billion of cash savings for the period. We have increased our full year cash savings target from ZAR22 billion to ZAR26 billion, mainly due to the reprioritisation of our capital portfolio. The RP places the company in a strong position to operate profitably within a US$40-50/bbl oil price environment. We expect our sustainable cash cost savings from our RP to be ZAR2.5 billion by 2019, in addition to the ZAR5.4bn sustainable savings from our BPEP.
Actual capital expenditure, including accruals, amounted to ZAR30.2 billion. This includes ZAR17.4 billion (US$1,2 billion) relating to the Lake Charles Chemicals Project (LCCP). We have revised our capital expenditure estimate from ZAR75 billion to R66 billion for the full year, largely due to the impact of the stronger rand/US dollar exchange rate coupled with our cash conservation initiatives and active management of our capital portfolio.
Cash generation and position
Our net cash position decreased from ZAR52 billion in June 2016 to ZAR28 billion at 31 December 2016, mainly due to the funding of the LCCP and the effect of a stronger closing rand/US dollar exchange rate. Loans raised during the period amounted to ZAR2 billion, mainly for the funding of our growth projects.
During the current financial year, Sasol entered into a number of hedges to mitigate specific financial risks and provide protection against unforeseen movements in oil prices, interest rates, currency movements, and commodity and final product prices. Approximately 50% of the crude oil exposure was hedged with crude oil put options for 2017 at a net price of ~US$49,50/bbl.
A total net loss of ZAR515 million (US$37 million) was recognised during the period. To manage the exposure to the US dollar, approximately 12% of the rand/US dollar exposure was hedged with zero-cost collar instruments at a floor of – ZAR14,10 for specific periods in 2018.
A net gain of ZAR283 million (US$20 million) was recognised during the period. Should attractive hedges become available in the market at an acceptable cost, we will enter into additional hedges as mitigation against these financial risks.
Cash generated by operating activities decreased by 37% to ZAR16.8 billion compared with ZAR26.7 billion in the prior period.
Notwithstanding reduced cash flows, our balance sheet has the capacity to lever up, as we continue to execute our growth plans and return value to our shareholders.
Accordingly, in support of our funding strategy, gearing increased to 25%, which is consistent with our previous market guidance of 20% to 44%.
To manage the impact of price volatility and the low oil price environment, the Sasol Limited Board (Board) concluded that our internal gearing ceiling will remain at 44% until the end of 2018. The net debt: EBITDA ratio is forecasted to be below 2,0 times. We actively manage our capital structure and funding plan to ensure that we maintain an optimum solvency and liquidity profile