S&P Global Ratings upgraded its long-term issuer credit rating on Sasol to BB+, one notch below investment grade, based on the company’s successful efforts to use the proceeds of asset disposals to reduce its debt load.
The ratings agency also praised Sasol, which is most well known for producing oil from coal, for its improved operating efficiency and better cash flow generation on the back of strong commodity prices. S&P, which had previously assigned a BB rating to Sasol’s debt, assigned a stable outlook to the company’s revised credit rating.
“The improvement in credit metrics is supported by a gross debt reduction using asset disposal proceeds, improvements in operating efficiency and supportive market conditions,” S&P said in a research note.
According to S&P’s analysis Sasol has disposed of about R56bn in assets since 2020 with the proceeds mainly used to pay down debt, which has fallen from about R190bn in the company’s 2020 financial year to about R105bn in the year to end-June 2022. Those efforts have been further augmented by improved cash preservation strategies, which ranged from reducing capital expenditure to improved efficiency in day-to-day operations, along with a strong recovery in global oil and chemicals prices.
Sasol’s funds from operations (FFO) relative to its debt improved to a ratio of 54% in the group’s 2022 financial year, ahead of S&P’s previous expectation of about 42% and far better than the 36% level in the 2021 financial year. S&P’s revised forecasts show it now expects Sasol’s FFO relative to its debt to stay above 45% through the cycle.
The ratings agency also said it expects Sasol to deliver earnings before interest, tax, depreciation and amortisation (ebitda) of R79bn in its 2023 financial year. Under S&P’s long-term oil price assumption of $55 per barrel it expects ebitda of about R55bn in the 2023 financial year.
“A positive rating action would hinge on a combination of the weighted average FFO to debt remaining above 45%, with at least adequate liquidity, continued improvement in operating efficiency metrics, and an upgrade of SA’s foreign currency sovereign rating,” S&P said.
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