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Sasol to acquire Canadian assets
Sasol through its wholly owned subsidiary, Sasol Petroleum International (Pty) Ltd, has reached an agreement to acquire a 50% participation interest in the high quality Farrell Creek Assets from Talisman for a total purchase consideration of CAD1 050 million (R7 119 million at the closing CAD/ZAR exchange rate of 6.78 on 17 December 2010) ("the transaction") with effect from 1 January 2011.
Details of the transaction
Transaction description
Sasol and Talisman have agreed to establish a 50/50 general partnership in Canada that will own the Farrell Creek Assets, whilst each of Sasol and Talisman will also hold an undivided 50% participation interest in the associated gas gathering systems and processing facility. Talisman will continue to operate the Farrell Creek Assets and the associated gas gathering systems and processing facility. Sasol will establish a Canadian legal entity to ultimately hold its 50% partnership interest in the Farrell Creek Assets and its 50% participation interest in the associated gas gathering systems and processing facility. Furthermore, Sasol and Talisman have agreed to jointly conduct a feasibility study on the economic viability of a GTL facility in western Canada. The two companies have also agreed to collaborate on other western Canadian natural gas opportunities.
Description of assets
The Montney basin is organically rich shale located in Canada's western Alberta and north-eastern British Columbia. Its primary formations are of mid- Triassic age and found at depths of around 8 000 feet. The average shale thickness of the Farrell Creek Assets is 1 200 feet. Talisman's 51 635 acres of Farrell Creek represents an estimated contingent resource of 9.6 tcf, this being the central estimate within a range from 4tcf to 12tcf. At the present time, as only the initial phase of the development plan has been approved and as production data exist only for the very early period of well performance, no more than a small percentage of this volume is anticipated to be included in Sasol's filing at the end of its current reporting year. Talisman currently produces approximately 40 - 60 mmscf per day of natural gas from Farrell Creek, selling all of it into the North American natural gas market.
Purchase consideration
The aggregate purchase consideration of CAD1 050 million (ZAR7 119 million) is structured as a cash payment of CAD262.5 million (R1 780 million) at closing for the acquisition of the Farrell Creek Assets and CAD787.5 million (R5 339 million) in the form of a carry of 75% of Talisman's 50% portion of the future cost to further develop the Farrell Creek Assets until such time that the aggregate purchase consideration has been paid in full. Thereafter, each partner will fund its 50% portion of the capital development costs for the Farrell Creek Assets. The aggregate purchase consideration will be funded from surplus cash available within the Sasol group.
Suspensive conditions
The transaction is conditional upon the fulfilment of the following suspensive conditions:
- conclusion of the definitive agreements;
- South African Exchange Control approval by the South African Reserve Bank;
- receipt of all required regulatory approvals and consents; and
- no material adverse change to the Farrell Creek Assets.
It is envisaged that closing will take place in the first half of 2011.
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Sasol polymers' settlement
As previously disclosed by Sasol as part of its ongoing disclosures, the South African Competition Commission has been investigating the South African polymers industry. Sasol Polymers, a division of Sasol Chemical Industries Ltd ("Sasol Polymers"), has now concluded a settlement agreement with the Competition Commission ("the Commission") in relation to its existing propylene supply agreement ("the supply agreement") with Safripol (Pty) Ltd ("Safripol"). The Commission concluded that the pricing provisions of the supply agreement gave rise to indirect price fixing between Sasol Polymers and Safripol.
The supply agreement was concluded pursuant to concerns raised by Safripol in relation to the proposed merger in 1993 of Sasol and AECI Ltd's monomer, polymer and certain other chemical operations. To address these concerns, the then Competition board required a supply agreement, which would ensure Safripol's ongoing access to propylene according to a pricing formula, which would result in market-related prices. At the time, neither party understood this pricing formula to give rise to competition law concerns. However, the Commission, in terms of the current Competition Act, found that the pricing formula, which required the exchange of pricing information amounts to indirect price fixing. This contravention is technical in nature and was not as a result of an intentional agreement to fix prices. The terms of the supply agreement, including the pricing formula, were prompted by the Competition board's requirements.
Given the uncertainty surrounding the legal position in relation to the pricing formula and the technicality of the matter, it was considered prudent to settle the matter. Sasol Polymers has therefore agreed to pay a penalty of R 111 690 000, which represents 3% of Sasol Polymers' turnover derived from its sale of polypropylene products for its financial year ending 2009. The settlement agreement is in full and final settlement of the Commission's allegations that the pricing formula gave rise to indirect price fixing. The settlement agreement is subject to confirmation by the tribunal. As part of its investigation into the polymer industry, the Commission has also contended that the prices at which Sasol Polymers supplies propylene and polypropylene are excessive. Sasol Polymers does not agree with the Commission's position in this regard and is contesting the Commission's allegations. Consequently, the Commission's allegations in respect of excessive pricing do not form any part of the settlement agreement concluded between the parties.
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Sasol -- update from chief financial officer
I am pleased to report that since our previous communication, our businesses have continued to perform well operationally. The Synfuels plant was safely and successfully commissioned after its largest ever planned maintenance outage. Oryx continues to sustain good operating rates and increased first quarter sales volumes from the chemicals businesses have contributed approximately one third of the group's operating profit. Product prices have shown an overall year-on-year improvement, largely mitigating the impact of the stronger rand. The sustained strength of the currency, however, remains a key challenge to the group. We are therefore focused on ensuring that our businesses remain robust with healthy margins by continuing with our efforts on the factors within our control, such as cost management and operational efficiency. Successful delivery of our offshore projects also provides a solid underpin to earnings diversification. Our growth strategy has been refocused towards accelerating the Gas-to-Liquids (GTL) value proposition and our efforts to increase natural gas reserves through exploration and/or acquisition opportunities remain on track.
Higher product prices largely negate the impact of the stronger rand The beginning of the current financial year was characterised by the sustained strength of the rand against the US dollar. The easing of monetary policy by the G4 economies created significant capital flows into emerging markets in search of yield and growth which, in our view, have contributed to the overall strengthening of these currencies. The global environment has created strong tailwinds for the rand. Our expectation is that the rand is likely to remain strong into the medium term.
Product prices, however, remained resilient, with higher oil prices and refining margins largely offsetting the negative impact of the strong rand. Average year-to-date domestic fuel prices are up 1% from the average price in the previous financial year. In the chemical markets, international polymer prices have not had the typical third quarter calendar year increase associated with restocking of packaging and agricultural film. US dollar prices for the first quarter of this financial year were flat compared to the average price received for the previous financial year. Year-to-date solvents commodity prices, however, showed a steady increase of almost 20% in dollar terms, compared to the average price for the prior financial year.
Modest increase in group turnover
Group turnover for the first quarter of the 2011 financial year was slightly higher than the quarterly average achieved during the second half of the 2010 financial year. This is largely attributed to higher product prices and production improvements, particularly from the group`s offshore businesses. Successful delivery on our offshore projects has improved the geographic earnings diversification, enhancing the robustness of the group. Our ongoing focus on controllable factors - cost containment, the improvement of operational and marketing efficiencies and optimising capital project returns - will support our efforts to sustain profitability and deliver sustainable long-term returns to our shareholders.
Energy efficiency initiatives drive reduction in costs
In 2006, a decision was taken by management to increase our electricity generation capacity in South Africa using natural gas as a feedstock. This was undertaken in anticipation of a significant rise in electricity prices and the increased risk of supply interruptions. Two 100 mega watt (MW) open cycle gas turbines were successfully commissioned in June this year. The turbines have been in full operation since mid-July with a combined production output of between 200MW and 220MW. This allows us to produce approximately 50% of our current electricity requirements. The new Power Purchase Agreement with Eskom, associated with this additional capacity enables Synfuels to significantly lower its net external electricity cost. As a further enhancement, we are currently installing two heat recovery steam generators to produce super-heated steam from hot exhaust gases. The steam will be used in Sasol Synfuels` existing steam turbine generators to generate an additional 80MW of electricity. This additional capacity is expected to be commissioned in the middle of the 2011 calendar year and is an energy efficiency optimisation that will not require additional feedstock. In the longer term, we are also investigating initiatives to replace natural gas feedstock with waste gas that is currently flared.
The group aims to undertake a similar electricity generation project at the Sasolburg facility which will generate 140MW of electricity using natural gas from Mozambique. These projects clearly indicate how rising energy costs have created opportunities for improved energy efficiency. Progress on functional excellence We continue to pursue our cost management efforts through our Functional Excellence programme. This initiative aims to reduce costs in support functions by simplifying, standardising and sharing business processes. Cost savings of more than R600 million arising out of the programme were achieved in the 2010 financial year, and we anticipate further savings in the coming financial year.
Investing in plant integrity and reliability at Secunda
The Synfuels operation commenced the largest maintenance outage in its 60-year history on Friday 27, August 2010. This was in order to ensure the ongoing integrity and long-term stability of the plant. This resulted in a statutory shut down of half of the plant in accordance with a planned maintenance schedule for a period of three weeks. With approximately 14 500 additional workers employed and over 150 000 activities completed, the start-up was delayed by a few days. We are, however, satisfied that the plant has been safely and successfully re-commissioned. Taking into account the impact of the three-week outage, the total production of 1,7 million tons (Mt) is in line with our expectations for the first quarter of 2011. However, the delay in re-commissioning does place our 7,3 Mt production target for the financial year at risk. With planned plant availability unconstrained for the remainder of the year, the Synfuels team considers 7,2 Mt to be a more realistic full year target.
Oryx GTL reports healthy profits and production volumes
Oryx GTL sustained operating rates at 83% of nameplate capacity during the
first quarter of the 2011 financial year, with actual production averaging 27 000 barrels per day. This is in line with the expected 80-90% operating rate range for this facility. This achievement augments the positive performance achieved since the beginning of the financial year. Unit costs in financial year 2011 are expected to drop from the 2010 level due to increased production volumes and despite a gas price increase effective 1 January 2011. With higher production and lower unit costs, we expect a healthy contribution to group operating profit from Oryx GTL in the current financial year.
Arya maximising polyethylene production
The ethane cracker at our Arya Sasol Polymer Company joint venture is constrained at 80% of nameplate capacity. Further ramp-up is inhibited by a design limitation in the demethaniser column associated with the cracker. We aim to rectify this constraint in the medium term and the detailed schedule for this activity is currently being planned. In the interim, we will operate close to the current capacity until this modification is implemented. Our downstream low-density and high-density polyethylene plants are, however, unconstrained and have ramped-up according to plan. We are therefore well placed to maximise production of polyethylene and to benefit from the higher margins associated with these value added products. Chemical cluster delivers one third of group operating profit Overall, our chemical cluster has had a very successful first quarter contributing nearly one-third of group operating profit. Our Olefins and Surfactants (O&S) business continues its outstanding performance by sustaining a double-digit operating margin and increasing sales volumes. Overall the chemical cluster has managed to increase the first quarter sales volumes by 2% compared to the prior year quarterly average.
Construction of Tetramerisation plant
We are pleased to announce that our board has approved the construction of a first-of-a-kind Tetramerisation plant. We are excited about commercialising our proprietary technology to manufacture octene by tetramerising ethylene. The planned capacity for this facility is 100 000 tons per annum and our plan is to complete construction by 2014 financial year. Our Lake Charles complex in Louisiana is an obvious choice for a site as ethylene feedstock will be sourced from our existing ethane cracker. There are other excellent site synergies such as high level engineering and process management skills. This project will enable us to build on our position as a leading supplier of co- monomers (1-octene and 1-hexene) and demonstrates Sasol`s culture of technology innovation.
Ixia Empowerment transaction concluded
In October 2010, we announced the conclusion of the Ixia Coal transaction which is in line with Sasol Mining`s empowerment strategy and its commitment to comply with the objectives of the Mineral and Petroleum Resources Development Act, and the Mining Charter. The transaction value is R1,8 billion and is financed through equity and a combination of third party funding and appropriate Sasol facilitation. This agreement effectively results in WIPCoal Investments owning 10,2% of the equity in Sasol Mining. We will recognise a loss on the disposal of the business and a non cash IFRS-2 charge (facilitation cost) that will impact the group attributable earnings per share by approximately R1 per share for the current financial year due to the delay in the implementation of the transaction. The transaction will, however, not affect headline earnings. Future growth focused on GTL and natural gas The group`s growth efforts have been refocused towards accelerating the GTL value proposition. We do, however, continue to progress current advanced Coal- to-Liquids (CTL) projects such as China CTL and India CTL. The arbitrage between oil and gas prices remains compelling, driven largely by changes in shale gas extraction technology. We believe there has been a structural shift in the dynamics between gas and oil prices, with gas prices likely to remain at depressed levels, thereby making GTL an even more attractive value proposition.
In the context of these price dynamics, GTL has become more competitive relative to Liquefied Natural Gas (LNG). Our efforts to increase natural gas reserves through exploration and/or acquisition opportunities remain on track. This will allow the group to accelerate its GTL value proposition. With Oryx GTL currently being the only large-scale commercial GTL plant globally, Sasol is well positioned to extend its competitive expertise and technology in providing a viable alternative to monetising stranded gas. We are nearing the completion of our feasibility study for a GTL facility in Uzbekistan and are satisfied with the progress made thus far. As previously communicated, the China CTL project is awaiting feedback from the National Development and Reform Commission (NDRC) and the State Council of the Republic of China, following which we will consider an investment decision. The group`s balance sheet remains robust and we are in a good position to fund our near-term projects and potential acquisitions.
Operational guidance on track for the full year
The group remains on track to deliver on its full-year expectation of continued improved operational performance and cost containment within inflationary levels. The strength of the rand remains a key risk to earnings for the year given the sensitivity of our business to the rand/US dollar exchange rate. Consideration will also be given to any adjustments arising from our half-year closure process, as well as re-measurement effects including the impact of the Ixia empowerment deal. An update on earnings guidance will therefore be provided once we have a reasonable degree of certainty on the interim results for financial year 2011. Sasol`s interim results for the six months ended 31 December 2010 will be released on Monday, 7 March 2011. The forecast financial information appearing in this update has not been reviewed or reported on by Sasol`s external auditors.
Annual General Meeting (AGM) feedback
Shareholders have, among other resolutions, approved the re-purchase of up to a maximum of 10% of the company's issued ordinary shares on the open market, subject to board approval, and in accordance with the Companies Act and the JSE Listings Requirements. Shareholders have also approved the resolutions required to facilitate the implementation of a trading mechanism involving the listing of the Sasol BEE ordinary shares on the proposed BEE segment of the JSE.
In closing
We were pleased to have been ranked as the oil and gas global sector leader in the internationally recognised Dow Jones Sustainability Index (DJSI) 2010, based on an in-depth global analysis of corporate economic, environmental and social performance. Sasol has also been ranked among the world`s top 100 companies for sustainability by the QCRD Global Sustainability (QCRD) Index's semi-annual report, issued on November 19, 2010. The award recognizes exceptional delivery, in the fields of environmental, social and governance issues, along with a strong financial performance. We were also encouraged that Sasol`s 2009 annual report was ranked 14th among the top 300 global annual reports out of the listed companies surveyed in the 2010 Annual Report of Annual Reports, published by Report Watch of e.com.
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