SSL

Sasol Limited Form 20-F Summary: Year Ended 30 June 2015

Business Context and Reporting Period

Company: Sasol Limited (South Africa)

Reporting Period: Financial year ended 30 June 2015

Business Overview: Sasol is an international integrated chemicals and energy company operating in 37 countries. Its business model is based on an integrated value chain producing liquid fuels, chemicals, and low-carbon electricity. Key segments include Mining, Exploration and Production International (E&PI), Energy, Base Chemicals, and Performance Chemicals.

Strategic Context: The year was characterized by a dramatic fall in crude oil prices (average Brent price of US$73.46/b, down 33% from the prior year). In response, Sasol implemented a "Response Plan" in January 2015 to conserve R30 billion to R50 billion in cash over 30 months, involving capital portfolio optimization, cost containment, and a revised dividend policy.

Key Financial Metrics

Note: Negative values in Net Cash indicate a net cash position (Cash exceeds Debt).

Material Changes vs. Prior Period

• Turnover: Decreased by 9% (R17.4 billion) primarily due to lower product prices driven by the 33% decline in crude oil prices. This was partially offset by a 10% weakening of the rand against the US dollar and increased sales volumes.
• Operating Profit: Increased by 2% (R731 million) despite lower oil prices. This resilience was driven by strong operational performance, increased volumes, and cost containment initiatives.
• Profitability Drivers:
  • Positive: A cash-settled share-based payment credit of R1.4 billion (vs. expense of R5.4 billion in 2014) due to a lower share price; a R1.4 billion decrease in depreciation due to the extension of asset useful lives; and a R6.8 billion improvement in remeasurement items (reversal of prior impairments).
  • Negative: Lower oil prices negatively impacted margins, though the impact was mitigated by the weaker rand.
• Impairments: Recognized partial impairments of R1.3 billion on Canadian shale gas assets and R1.3 billion on Etame assets in Gabon due to low commodity prices. However, these were offset by a R2.0 billion reversal of impairment on the FT Wax Expansion Project.
• Segment Performance:
  • Energy: Operating profit decreased 28% due to lower oil prices, though volumes increased.
  • Base Chemicals: Operating profit increased 51% due to volume growth and a reversal of a competition penalty.
  • Performance Chemicals: Operating profit increased 7%, aided by the impairment reversal on the FT Wax project.
  • Exploration & Production (E&PI): Recorded a loss of R3.2 billion, improved from R6.0 billion in 2014, largely due to lower impairments compared to the prior year.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued volatility in crude oil prices and the rand/US dollar exchange rate. The company expects oil prices to remain volatile at lower levels in the short-to-medium term.
• Capital Strategy: Sasol has delayed the final investment decision on its US Gas-to-Liquids (GTL) plant. Capital expenditure for 2016 is forecast at R70 billion (up from R45 billion in 2015) due to the weakening rand and project phasing.
• Dividend Policy: Changed from a progressive policy to one based on a dividend cover range. The 2015 dividend cover was 2.7 times.
• Key Risks:
  • Commodity Prices: Continued low oil and gas prices impacting margins and asset valuations.
  • Exchange Rates: Volatility in the rand/US dollar exchange rate significantly impacts turnover and costs (approx. 90% of turnover is USD-linked).
  • Regulatory & Legal: Ongoing investigations by the South African Competition Commission regarding pricing in the petroleum and polymer industries; potential carbon tax implementation in South Africa; and environmental compliance costs.
  • Operational: Electricity supply constraints in South Africa (load shedding) and water scarcity risks.

Investor Verification Checklist

• Oil Price Sensitivity: Verify the impact of sustained low oil prices on the Basic Fuel Price (BFP) formula in South Africa and refining margins.
• Capital Commitments: Review the R116 billion in unspent capital commitments, specifically the R85 billion commitment for the Lake Charles Chemicals Project and the status of the US GTL project.
• Competition Litigation: Monitor the outcome of the Constitutional Court application regarding the Competition Appeal Court's decision on the Sasol Polymers pricing case (R534 million penalty reversed).
• Asset Impairments: Assess the sensitivity of Canadian shale gas and Gabon oil assets to further declines in commodity prices.
• Regulatory Compliance: Track progress on South African air quality compliance (National Environmental Management: Air Quality Act) and potential carbon tax implications.