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Sasol - Covid-19, credit rating and oill hedging
Response to Covid-19 measures
Sasol welcomes and fully supports the directives announced by South African President Cyril Ramaphosa on 23 March 2020, to combat the spread of COVID-19 in South Africa, including a three-week country-wide lockdown (“the COVID-19 directives”), which effectively commenced on Friday, 27 March 2020 and will continue until Friday, 17 April 2020.
In South Africa, Sasol’s products and services, by and large, are classified as essential goods and services as per Annexure B of the Lockdown Regulations issued by the Minister of Cooperative Governance and Traditional Affairs on 25 March 2020. Sasol plans to run its South African-based operations for the duration of the lockdown, and will work with the Government to ensure business continuity and uninterrupted supply of fuels and chemicals in South Africa during this period. However, some plants will be required to reduce throughput, or potentially shutdown following lower product offtake by our customers due to the lockdown. Furthermore, some intermediate chemicals will be re-directed to the production of products where demand is not impacted, to the extent possible. To this end, Sasol has formulated a special blend of alcohols to address the increasing demand for sanitizer alcohols, and will expedite the production and availability of these critical products locally to help safeguard the health and wellbeing of South Africans.
Sasol is collaborating with the South African Department of Trade, Industry and Competition (DTIC) and is also prioritising supply to Government entities and other essential services to jointly combat the spread of the virus in South Africa. The health and wellbeing of employees remains Sasol’s foremost priority and appropriate measures have already been taken to mitigate the risk of COVID-19 infection across all of Sasol’s sites. These measures are being strictly enforced and closely monitored to ensure the ongoing safety of employees and the public.
Outside of South Africa, most of Sasol’s operations are continuing, with no significant impacts to North American Operations (NAO) or its supply chain, or to the Lake Charles Chemicals Project (LCCP) construction to date. Chemical manufacturing is defined as a critical infrastructure sector, and therefore NAO and the LCCP is exempt from the stay-at-home order issued by the Louisiana government. All European and Asian assets are currently in operation. The Central Processing Facility (CPF) in Temane, Mozambique, which supplies natural gas to Mozambique and South Africa is not affected. Sasol continues to work closely with suppliers and customers to ensure uninterrupted supply, where possible.
The COVID-19 situation is highly dynamic and with infection rates continuing to increase in many countries, there is a risk of interruptions to production, construction and associated supply chains, along with a potential impact on demand and product pricing in some sectors. Shareholders are therefore advised that this could impact Sasol’s earnings for 2020 financial year (FY20). The impact on the business, suppliers and customers is being continuously evaluated and an update will be provided in the Q3 FY20 Business Performance Metrics report.
Update on credit rating and oill hedging
Sasol notes that the credit rating agencies, S&P Global Ratings (S&P) and Moody’s have updated their credit rating assessments of Sasol in light of the impact of the COVID-19 pandemic on global growth and the volatility in the oil price. S&P has announced that it has revised Sasol’s BBB- rating, which was affirmed on 7 March to BB, with a negative outlook, while Moody’s also announced that it has revised Sasol’s Ba1 rating to Ba2 and placed the company under review for a downgrade. Moody’s stated that “South Africa’s 21-day lockdown to contain the outbreak creates further uncertainty on near-term financial performance, while an extended lockdown beyond the original timeline could further affect performance”. The cost of some of Sasol’s floating rate debt is partly linked to our credit rating and the revised rating profile will therefore result in an increase in finance costs from existing facilities of approximately USD10 million per annum. As stated in the market update on 17 March 2020, Sasol has developed a comprehensive response strategy, which is being executed to mitigate the impact of COVID-19 and a lower oil price as far as practically possible. This includes a cash conservation programme, an accelerated and expanded asset disposal and partnering programme, as well as a potential rights issue of up to USD2 billion, which remains subject to the progress of other initiatives. Sasol maintains a long- term commitment to achieving an investment grade credit rating.
Further to this, progress has been made on Sasol’s hedging programme reducing Sasol’s exposure to any further short term pricing downside. Oil hedges are in place for approximately 80% of Synfuels fuels Q4 FY20 production, at approximately USD32 per barrel. Crude oil hedging execution will continue for the next 12 months, while USD/ZAR and ethane hedging programmes have been executed for the next twelve month period. Sasol continues to have liquidity of approximately USD2,5 billion to provide an additional buffer against short term volatility. Fleetwood Grobler commented “This is an unprecedented time in the history of Sasol and the world. We will continue to take decisive action to help safeguard the health and well-being of our employees and provide essential products to the many stakeholders that rely on us, while we reposition the business to enhance its long term future.” Shareholders are advised to continue to exercise caution when dealing in the Company’s securities until a further announcement is made.
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Sasol - appointment of director
Shareholders are advised of the appointment of Ms Katherine Harper, a national of the United States of America, as an independent non-executive director of the Company and a member of the Audit Committee, with effect from 1 April 2020.
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Sasol - cash generation plan & cautionary
Shareholders are referred to the SENS announcement issued on 12 March 2020, where Sasol announced it was reviewing a variety of actions to address the challenges created by the impact of COVID-19 and the recent decline in the oil and chemical prices.
In the short term, Sasol needs to enhance cash flow and reposition the balance sheet on the assumption that there is a sustained low oil price until the end of financial year 2021. It is important to reiterate that Sasol currently has available liquidity of approximately USD2.5 billion with no significant debt maturities before May 2021 and it therefore believes it is positioned to withstand recent market volatility in the short term. Sasol believes it can maintain liquidity headroom in excess of USD1 billion over the next 12 - 18 months with a USD25 per barrel oil price before the benefits of hedging.
Sasol can today announce a comprehensive response strategy designed to mitigate the impact of these macroeconomic factors. This includes a commitment to re-set the organisation to be globally competitive in a sustained low oil price environment. The global portfolio of our foundation business remains cash positive under prevailing spot market conditions and an oil hedging programme has been put in place to insulate the balance sheet from further financial pressure.
A package of measures is being undertaken that is intended to fundamentally reposition the Company over the following 24 months:
- A cash conservation programme focused on enhancing cash flow and cost competitiveness in a low oil price environment, with USD2 billion cash delivery ahead of current plan targeted by 30 June 2021;
- An accelerated and expanded asset disposal programme executed in line with balance sheet, shareholder value and strategic objectives with a view to deliver proceeds significantly ahead of the USD2 billion currently targeted;
- Potential for partnering options at Sasol’s US Base Chemicals assets; and
- A potential rights issue, which has been underwritten on a standby basis, as a supplemental initiative to reset the capital structure, subject to the progress made on cash conservation initiatives and asset disposals.
Collectively these actions target generating at least USD6 billion by the end of financial year 2021. This is expected to reshape Sasol’s balance sheet and provide the platform to deliver a globally competitive business with high cash yielding assets. Further to this, Sasol is in discussions with its lenders about additional flexibility in respect of its financial maintenance covenants to provide improved balance sheet flexibility in financial year 2021.
Conclusion
Sasol has a high quality, well diversified global portfolio with a range of strategically advantaged assets and value chain integration. Sasol believes that the portfolio can be positioned to be sustainably profitable in a future low oil price environment. A reshaped and strategically focused portfolio based on cost, technology and market advantage is planned. If assets do not increase the competitive advantage of this future Sasol, they may be exited, or selective partnering may be pursued. Sasol aims for an asset portfolio that is globally diverse across sectors and able to operate at the low end of the cost curve in each sector and region.
The immediate focus is on the actions to stabilise the Company and protect the balance sheet so that the underlying value of the portfolio is not compromised, and instead the potential realised in the interests of all Sasol’s stakeholders.
In light of this, the agenda of the Capital Markets Day planned for November 2020 will be focused on demonstrating progress against our short-term management actions, including asset disposals, and our sustainability roadmap to meet our 2030 targets.
Sasol believes the immediate and decisive implementation of the measures announced today can reset Sasol’s capital structure and align it with the cash generation of the asset portfolio in a low oil price environment. We believe that the future Sasol will have a strong value proposition, with the capacity to deliver returns to shareholders from the portfolio and also generate sufficient cash for strategic growth and a sustainable future.
Cautionary Statement
Shareholders are advised to exercise caution when trading in the Company’s securities until such time as the full details of the disposals and the potential rights issue are published.
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Sasol - market update and cautionary announcement
The unprecedented set of combined challenges driven by COVID-19 and the significant decline in the oil price have come at a time when Sasol is in a peak gearing phase as the Company completes LCCP.
Sasol is confident that its foundation business is capable of positive cash flow from operations in a low oil price environment. At the prevailing Rand oil price of approximately R580/bbl, Sasol will be within the current covenant levels at 30 June 2020. In anticipation of a lower-for-longer Rand per barrel oil price, a comprehensive package of actions is being finalised to deliver this and sustainably strengthen the balance sheet. It is important to note the current liquidity position:
- Sasol has current cash and available facilities of approximately USD2.5 billion; and
- Sasol has no significant debt maturities before May 2021.
Sasol is prioritising the following actions, details of which will be announced to the market on Tuesday:
- Business optimisation to reduce costs;
- Working capital optimisation;
- Re-scheduling some capital expenditure;
- Expanding the scope of, and accelerating, the asset disposal programme to realise proceeds in excess of the current USD2 billion target;
- Engaging our lending groups. Thus far, engagements have been constructive; and
- Assessing alternatives to manage Sasol's near-term debt covenant constraints, including a potential equity issue.
Sasol will update the market on the conference call at 15:00 SA on Tuesday, 17 March, with detail on the comprehensive package of actions.
Shareholders are accordingly advised to exercise caution when dealing in the Company's securities until a further announcement is made.
Conference call details:
South Africa
- Tuesday, 17 March 2020
- Time - 15:00
- Dial-in numbers - 011-535-3600
- Replay numbers - 010-500-4108
- Passcode - 31413
The transcript will be available from March 20, 2020 at 6:00 PM (SA) on Sasol's investor relations website.
For online participation, please register on the following link: www.corpcam.com/Sasol17032020
If you have any questions, please email: investor.relations@sasol.com or contact Feroza Syed at 010-344-9280.
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Sasol - update on conference call
Sasol was scheduled to host a conference call on Tuesday, 10 March 2020, at 15:00 (SAST) in order to discuss the recent outcome of the periodic ratings review by S&P Global and Moody's.
Given the latest developments where oil prices have declined significantly and increased market volatility, the conference call will be moved to Tuesday, 17 March 2020, at 15:00 (SAST). This allows more time to assess the impact of these latest developments on the market and Sasol in particular.
Balance sheet protection remains a key priority. As communicated during the interim financial results, we continue to actively manage the balance sheet and several steps have already been taken to mitigate market volatility. This includes our hedging programme to mitigate commodity price movements and exchange rate exposures. We have hedged our USD/ZAR exchange rate and ethane exposure, but oil price exposure is not hedged for the remainder of FY20.
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Sasol - update on credit rating
Sasol notes that the credit rating agencies, S&P Global Ratings (S&P) and Moody's have completed their periodic review of Sasol following the release of the company's interim financial results for 2020. S&P has affirmed Sasol's BBB-/A-3 credit rating whilst Moody's has downgraded Sasol's credit rating to Ba1/NP. The ratings action by Moody's reflects Sasol's elevated leverage in the context of volatile market conditions.
As stated in Sasol's recent financial results, protecting the balance sheet remains an important priority during the peak gearing phase. In this regard, several proactive actions have already been taken which include a measured financial risk management programme to hedge oil and ethane commodity price and exchange rate exposures, managing costs, increasing working capital efficiency and agreeing additional flexibility on covenants with the lending group. These initiatives continue to benefit the balance sheet with further actions underway. These include re-phasing discretionary capital, ongoing delivery of the value-driven asset disposal programme and active balance sheet management to maintain a healthy liquidity position and a balanced debt maturity profile as Sasol works to restore an optimal capital structure. Sasol maintains a long-term commitment to an investment grade credit rating.
Subject to the macroeconomic environment and the impact of COVID-19 on global product demand, Sasol continues to expect the cash flow inflection point to be reached in the second half of FY20 and de-leveraging to start thereafter. The overall Lake Charles Chemicals Project ("LCCP") cost estimate is tracking US$12,8 billion, within our previous guidance of US$12,6 - 12,9 billion. LCCP is expected to be EBITDA positive in the second half of FY20 with a contribution of US$50 - US$100m for FY20.
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| Closing price data source: JSE Ltd. All other statistics calculated by ProfileData. |
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