SSL

Sasol Limited (SASOL) - Form 20-F Summary

Business Context and Reporting Period

Company: Sasol Limited (South Africa)

Reporting Period: Year ended 30 June 2016

Accounting Standard: International Financial Reporting Standards (IFRS)

Currency: South African Rand (ZAR), with US Dollar (USD) translations provided for convenience.

Sasol is an international integrated chemicals and energy company. Its operations are heavily dependent on coal-to-liquids (CTL) and gas-to-liquids (GTL) technologies. The 2016 financial year was characterized by a significant decline in global crude oil prices and a weakening of the South African Rand against the US Dollar.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Turnover decreased by 7% primarily due to a 41% drop in average Brent crude oil prices (from $73.46/bbl in 2015 to $43.37/bbl in 2016). This was partially offset by the weakening of the Rand (average exchange rate R14.52/USD in 2016 vs R11.45/USD in 2015).
• Profitability Compression: Operating profit fell 48% to R24.2 billion. The decline was driven by lower product prices and significant remeasurement items (impairments) totaling R12.9 billion.
• Impairments:
  • Canada: R9.9 billion impairment on shale gas assets due to persistently low gas prices.
  • US (Lake Charles): R956 million impairment on the low-density polyethylene (LDPE) unit due to increased capital costs and lower margins.
  • Gabon: R994 million loss including higher depreciation due to lower oil price reserves.
• Capital Expenditure: Net cash used in investing activities increased to R71.0 billion, driven by R42.4 billion spent on the Lake Charles Chemicals Project (LCCP) and settlement of funding commitments in Canada.
• Debt Profile: The company moved from a net cash position of R5.4 billion in 2015 to net debt of R30.2 billion in 2016, reflecting increased borrowing to fund the LCCP and other capital projects.

Guidance, Outlook, and Risks

• Lake Charles Chemicals Project (LCCP):
  • Management confirmed a revised total capital cost estimate of US$11 billion, an increase of US$2.1 billion from the original estimate.
  • Project completion is approximately 50%. The schedule remains unchanged, with beneficial operation expected in phases starting late 2018.
  • Expected returns are slightly above the company's US dollar weighted average cost of capital (8%), though lower than originally projected.
• Cash Conservation: Sasol increased its cash conservation target to between R65 billion and R75 billion, extending the program to at least the 2018 financial year to ensure balance sheet strength in a low oil price environment.
• Key Risks:
  • Commodity Prices: Continued volatility in crude oil, natural gas, and petrochemical prices.
  • Exchange Rates: Fluctuations in the Rand/USD rate significantly impact reported results and debt servicing costs.
  • Regulatory/Environmental: Compliance with South African air quality and carbon budget regulations poses significant cost and operational risks.
  • Project Execution: Risks of further cost overruns or delays on the LCCP and Mozambique projects.

Investor Verification Checklist

• LCCP Cost Certainty: Verify the sufficiency of the US$11 billion cost estimate and the impact of the US$2.1 billion overrun on long-term returns.
• Debt Servicing: Assess the company's ability to service increased debt levels (Net Debt R30.2 billion) given the reduced operating cash flow.
• Impairment Reversals: Monitor the likelihood of further impairments in Canadian shale gas assets if commodity prices remain low.
• Regulatory Compliance: Review the status of South African air quality compliance and potential costs associated with carbon taxes or budgets.
• Dividend Sustainability: Evaluate the sustainability of the dividend policy (dividend cover of 2.8x) against the backdrop of lower earnings and high capital expenditure requirements.