Sasol reports earnings drop, pledges asset review
Thursday, Aug 31, 2017
South African firm Sasol has reported a drop in full-year headline earnings, blaming the strength of the domestic currency and low oil prices alongside company-specific problems including industrial action and a tax dispute.

The projected returns to be realised from the firm’s delayed flagship international project – a multi-billion-dollar US petrochemicals plant – were also reduced, and while shareholders were assured that the venture remained competitive, completion of a wider asset review was promised by the end of the year.

Headline earnings per share – the preferred profitability barometer for Johannesburg-listed firms – fell by 15% to 35.15 rand (US$2.7) on account primarily of the strengthening of the average rand/US dollar exchange rate over the course of the 12 months to 13.61 rand (US$1.04). This compares to 14.52 rand (US$1.11) in the year ending in June 2016.

Sasol’s costs are priced chiefly in local currency while its products are priced primarily in dollars. Total earnings per share – which increased by 54% to 33.36 rand (US$2.56) – were flattered by a one-off impairment during the previous financial year taken against a Canadian shale asset. The loss from that during 2016/17 was pared to 746 million rand (US$57.3 million).

Returns from the company’s mining division were down 21% to 3.7 billion rand (US$284 million) on account of a prolonged strike during the second half of 2016 at the company’s Secunda mine. Meanwhile, the ‘energy’ division – comprising liquid fuels assets – recorded a 20% decrease in operating profit to 11.2 billion rand (US$860 million) through a combination of lower refining margins, currency losses and an outage at the firm’s Natref refinery in Sasolburg.

A positive contribution was made by a 14% increase in the utilisation rate at the flagship Oryx GTL gas-to-liquids plant in Qatar. The more-troubled Escravos GTL facility in Nigeria was reported likewise to be being ramped back up to full capacity followed a maintenance shutdown.

Sasol also revealed some details of an ongoing tax dispute with the South African Revenue Service relating to an alleged underpayment of 1.2 billion rand (US$92 million) over the 2005-2014 period. A judgement in the authorities’ favour in late June forced Sasol to recognise a 1.2 billion rand (US$92 million) liability in the annual results but the firm emphasised the intention to appeal, having been granted leave to do so in mid-August.

In August last year, the company’s cost estimates soared by 24% to US$11 billion for the planned Lake Charles Chemicals Project (LCCP), which comprises an ethane cracker and derivatives units in Louisiana. The envisaged completion date was also pushed back by a year to late 2018.

The annual statement noted that construction was now proceeding according to the revised schedule and budget – with the facility 74% complete at the end of June and with US$7.5 billion having been spent.

However, Sasol lowered the projected long-term internal rate of return to 7-8% on account of “structural changes in the market” and based on “conservative ethane prices”.

Shareholders were assured that the cracker remained cost-competitive – at the lower end of the cost curve for ethylene producers. Market conditions were asserted to be favourable for a planned 470,000 tonne-per-year high-density polyethylene (HDPE) plant in Texas, an equal joint venture with London-based Ineos – which was reported to be due for completion by year-end.

Sasol pledged continued commitment to domestic investment – including a multi-billion-rand mine replacement programme designed to allow coal supply to the firm’s core Secunda Synthetic Operations to be maintained until 2050.

Meanwhile, it also restated its intent to attain over the longer-term a roughly 50:50 balance between local and overseas earnings.

A shift away from energy towards chemicals is envisaged increasing the latter’s contribution to around 60%.

Core headline earnings – deemed by Sasol “an appropriate indicator of the sustainable operating performance of the group” – rose by 6% to 39.06 rand (US$3) per share. Two cost-cutting programmes – one initiated before the oil price downturn three years ago and one devised in response – were pronounced a success.

The so-called Business Performance Enhancement Programme of cost control, launched in 2013, was closed at the end of the financial year, having delivered a target of 5.4 billion rand (US$415 million) in annual savings a year ahead of schedule. Meanwhile, the Response Plan, aimed at ensuring the company was capable of operating profitably at crude prices as low as US$40 per barrel, was said to have achieved capital conservation and cash savings of 32.3 billion rand (US$2.5 billion) in 2016/17.

However, Sasol professed to recognise shareholders’ continuing concerns about capital allocation and revealed that a review of assets worldwide was in train to determine, according to joint CEO Stephen Cornell, “if they’re value accretive, [if they are] meeting our return hurdles, [if they] fit in with our strategy”.

Capital expenditure of 60.3 billion rand (US$4.6 billion) in the last financial year was projected to fall marginally in the current year to 59 billion rand (US$4.5 billion), and to drop substantially to 37 billion rand (US$2.8 billion) in 2018/2019 as the LCCP is commissioned.

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