Chemicals and energy group Sasol has opted to hold onto its interim dividend for its half year to end-December, in which the benefits of surging energy prices and a recovery in demand were offset by operational issues, including poor coal availability in SA.
Buoyant oil prices helped cash generated by operating activities jump 73% to R20.3bn to end-December, Sasol said on Monday, but headline earnings fell almost 20% to R9.5bn, with the group hit by a number of non-cash adjustments.
Notably, the group recorded R5.3bn in losses on the valuation of financial instruments and derivative contracts, which can limit the risk of volatility in oil and currency markets, as the rand weakened.
Mining productivity also fell 16%, with its SA operations experiencing a number of incidents, resulting in five fatalities.
In 2021 the group experienced operational incidents at its coal mines, including a fire at its Shondoni mine, as well as a high-wall failure at its Syferfontein mine, both of which had no fatalities. An underground water reservoir incident at its Bosjesspruit mine resulted in three deaths.
Sasol had already flagged in December that production at its Secunda operations would be affected by the availability and quality of coal that led to the company revising its year-end target for production from the Secunda operations down by 8% to 6.7-million to 6.8-million tonnes.
Apart from the safety incidents that resulted in operational stoppages, mining productivity was also affected by adverse weather conditions and slower than expected ramp-up of the full calendar operations integrated shift system (Fulco).
Replenish coal
The Fulco system would allow Sasol to achieve higher coal-mining output by running operations for seven days a week instead of five. “This is a big intervention and with our preparation and implementation of Fulco we probably underestimated the challenges that [would come from] such a big change,” Sasol CEO Fleetwood Grobler told Business Day.
The company is well on its way to replenish its coal stock pile. It had already reached a target to increase the stock pile from 900,000 tonnes at end-December to 1.1-million tonnes by end-February, placing the company solidly on its trajectory to meet the target guidance of 1.3-million to 1.5-million tonnes of coal in stock by end-June.
Sasol, which described its own performance as “mixed”, benefited from a 62% increase in the average rand per barrel price of brent crude oil during the period, and a 49% increase in the average chemicals sales basket price.
The company supplies about 30% of the fuels needed in SA out of the Natref refinery in which it owns a 63% share, as well as its synthetic fuel production facility in Secunda.
Grobler said that the company is yet to decide about whether it will keep the Natref facility given the amount of capital it would have to spend to upgrade the facility to comply with new rules published by the government last year that lowered the sulphur content allowed in the country’s diesel fuel.
To comply with these rules, which will come into effect in September 2023, some oil refineries would have to upgrade their facilities at costs that could run into billions of rand.
Sasol and its joint venture partner Total have previously indicated that they will consider selling the Natref refinery at Sasolburg, but said no conclusion had been reached yet about the future of this facility.
Spend capital
“We have embarked on a R5bn capital project to get the Secunda [synthetic fuel] facility clean fuels compliant by 2025,” Grobler said. But, he added, they are still mulling various options for the Natref refinery.
Sasol and Total still have to determine whether it will be “wise” to spend the capital that would be needed to upgrade the facility, or whether they should rather look at other options such as turning the facility into a biorefinery.
SA’s largest crude oil refinery, Sapref, owned by Shell and BP, announced earlier this year that it will pause refinery operations indefinitely.
“Despite the current risks and uncertainty playing out, there are clear signs of recovery to prepandemic levels,” Grobler said in the results.
“Our Sasol 2.0 transformation programme is well under way and delivering value against the targets set for cash fixed cost, gross margin, capital and working capital,” he said.
“Though, we might have to reprioritise and phase the interim Sasol 2.0 targets as a result of the operational challenges, we remain committed to deliver the set targets by 2025,” said Grobler.
Earnings before interest, tax, depreciation and amortisation (Ebitda), or core profit, increased 2% to R31.2bn to end-December.
Sasol hasn't paid a dividend since its 2019 half year, and has made clear it needs to improve its balance sheet first, saying on Monday it is also considering the “high level of macroeconomic uncertainty” it faces.
A weaker rand weighed on the group’s debt to end-December that rose to R109.2bn from R102.9bn at end-June, with a weaker rand having a R11.7bn effect.
In morning trade Sasol’s shares were down 1.69% to R323.69, but have still risen about a quarter so far in 2022, and almost 60% over the past twelve months.
Update: February 21 2022
This article has been updated with share price information.
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