Sasol is not paying a dividend

CEO Fleetwood Grobler confirms that some of the Heps downward pressure came from valuation changes to the company’s financial instruments and derivatives.

PETRI REDELINGHUYS: On the line we have Fleetwood Grobler, the CEO of Sasol,  which released some interesting [interim] results today, and we have the opportunity and privilege to speak to him. Fleetwood, thank you very much for joining us this evening.

FLEETWOOD GROBLER: Good afternoon and thank you so much for having me.

PETRI REDELINGHUYS: It’s only a pleasure. A decent set of results came out of Sasol today — at least I thought so. We’re looking at earnings before interest and tax increasing around 12%. However, the market is not reacting to that wonderfully. It has fought back and actually ended the day relatively all right, but throughout the course of the day there was quite a bit of negative pressure on the share.

At least from my perspective there are a few things that are a little confusing. If we look at headline earnings per share, we see that that’s down by around 20%, and looking at some of the highlights and commentary as published in the Sens article, it seems to me – and correct me if I’m wrong – but some of the headline earnings per share pressure came from some of the valuation changes on the financial instruments and derivatives contracts that you have. Is that a correct assessment?

FLEETWOOD GROBLER: That’s a correct assessment. I think we pay more attention to the core headline earnings per share which, if you look at that number, has increased more than 100% to R22.52. The reason simply put is that the headline earnings per share do take into account these remeasurement items, which is taking the valuation of your financial interest, our hedging programme, because in the prior year we had a positive result on the contribution of the financial interest. This year it was a negative result.

Of course, our focus with the protection on balance sheet and through the hedging programme is to protect downside risk, not to make money on the upside and bet on oil prices and try to hedge on those levels, but really to protect the balance sheet on the downside. So you can expect, if your risk-mitigation step is this type of instrument, that it may have different results in different years. Therefore when you normalise that and you really look at core headline earnings per share, you’ll see that uptick quite nicely was more than 100%.

PETRI REDELINGHUYS: Essentially, just to sort of break that down for the listener who might not understand, what we’re doing here is we’re sort of fixing the price at which you sell oil for a year or two years out. Then, if the oil price goes above that price, it’s a detriment, but if the oil price drops below that fixed price it makes you an additional profit by protecting your income, essentially.

FLEETWOOD GROBLER: Correct. But there are various instruments. So you get a put option where you just say that is the price at which you protect, and you pay a premium from that. You can go for zero-cost collars where you say, okay, I’m in the money between, say, $60 and $70 [per barrel]. If you’re above that, you’re not in the money. If you are below that, you’re locked in and you can also do swaps.

So we normally look at a combination of various instruments that we take through a Monte Carlo Simulation to get the best outcome in terms of the risk we want to protect on the downside. So it is not always a clear-cut instrument in combination that you use, but it’s a variety of instruments that you hedge with.

PETRI REDELINGHUYS: Okay. This leads me to my next question. You’ve mentioned that most of the sort of hedging had been done for 2022 and you have almost completed 2023’s hedging activities. I’m guessing that it means that you have a relatively strong view of what you think is going to happen to the oil price – or are you literally just doing the same thing: taking the number that you need to earn in order to remain robustly profitable and hedging in that price? Or where does oil go from here, I guess is my question.

FLEETWOOD GROBLER: We don’t change our thinking in terms of the risk we want to mitigate, and that is a balance-sheet risk now.

We’ve been making very nice progress with the reduction of net debt and we believe that by the end of this financial year we’ve got the prospect, in terms of the bank debt definition of net debt, that we would be below R5 billion.

Remember, not so long ago we were above R10 billion, so we’ve made really good progress.

The way that we were thinking about it is really to say, do we need to have a hedge cover ratio? That means how much of your oil-derived output do you need to hedge? Whereas in the past financial year that cover ratio was much higher, 80-100% of the oil underlying input, going forward we may reduce that to a 50% or 60% hedge. That means the rest we keep open for market forces to play out and to see both upside and downside.

But in a market where there is more propensity for oil price increases, and we can’t bank that because we live in a very volatile world, the only way that we can balance that out is to reduce the cover ratio. But that we will still use instruments that give us the ability to protect the downside is fully on the cards, and we are looking at those instruments to implement.

PETRI REDELINGHUYS: All right. It’s a very complicated job by the sounds of things. I also noticed that you guys did relatively well – at least in terms of earnings before interest and tax – on your gas business. That almost doubled, which is great. How much of that is input from what was being called the energy crisis in the northern hemisphere, with gas prices and electricity prices going through the roof. Has that been beneficial to you?

FLEETWOOD GROBLER: I think we are not benefiting from any prices in that regard because we don’t have gas sources that we sell. As a matter of fact, we have divested our Canadian shale gas assets. Part of the reason why you see that uptick in our gas business was that we had a realisation of a foreign-currency translation reserve on the divestment of that asset of the shale gas assets that came through the income statement. That inflated the profitability by about $4.9 billion, which was the foreign currency translation reserve that came in.

You need to normalise that out to see the true underlying performance, so it is not as simple as just looking at the number year on year because that once-off came through the income statement.

PETRI REDELINGHUYS: Right. Okay. And then one last question – we’re almost out of time, sorry for that – but you’ve got some bonds maturing, I think, or some commercial paper in August 2022 and November 2022. It looks as though you have enough cash on hand to just pay it off. That’s a good place to be in, right? I guess maybe it’s less of a question than a comment but, compared to two years ago to now, it’s been a massive reduction in debt and sort of streamlining of the business. This is starting to pay off by the look of things.

FLEETWOOD GROBLER: Yeah. I think our Sasol 2.0 programme, the strategy-led divestment asset programme, as well as our cash flow from ongoing business, those in combination really help us to manage the balance sheet into a better position. What is also pleasing is that at the end of this year we’ve got liquidity headroom of around $5.7 billion, which are lines that’s available to us. We are looking at repaying the outstanding debt on our commercial paper, which is about R2.2 billion, and there’s a US$1 billion US dollar bond that we would also pay up in in August of this year.

Of course there are many ways to look at that. There are other instruments that we can take up in that place, but I think there are huge improvements in the situation of our balance sheet and we are very pleased to be in this situation rather than [that] a year ago.

PETRI REDELINGHUYS: You mentioned in the Sens article that there were some operational challenges at Secunda. I was wondering if you could maybe elaborate on what those are and what we could expect in terms of progress being made to do some maybe outstanding or backlog maintenance, or what the situation at the Secunda plant is.

FLEETWOOD GROBLER: The Secunda value chain is really underpinned by the coal supply out of our colliery mining system in Secunda. We had some operational challenges in the mining area. I think the Secunda operations have gone through their operational issues and most of those have been addressed. We indicated that we had a shutdown that took us longer than we planned in September and  we had one operational upset that followed that, in that we lost some production volume. But the biggest impact was the ability to supply consistent feedstock to our operations. That was underpinned by two or three areas that I would like to highlight.

We indicated to the market in December, when we revised our forecast volumes out of Secunda down to 6.7 to 6.8 million tonnes for the full year, that was because we had implemented a full calendar operating system in our mines  and we had encountered some challenges in the ramp-up of that full benefit from the Fulco system, and that that was also aggravated by impacts on the volume production by severe safety incidents that we had in the mining area, as well as the adverse weather conditions that hampered the supply of coal when we brought in coal and also from our Isibonelo contracted source, which is an open-pit mine that that was also impacted by severe rains in Mpumalanga during that period.

Now, all of those in combination really put us in a position where we had to revise down our forecast and we are now building stockpile in Secunda. We have indicated that we want to be, by the end February, at a level of 1 million to 1.1 million tonnes. As of yesterday, we are pleased to be at the position where we’ve just seen a bit more than the 1.1 million tonnes in our stockpile, and we are working that up further as productivity and as purchases of coal increase, so that we can get the stockpile level to 1.5 million tonnes by the end of the financial year. That will give us much more flexibility to deal with coal-quality issues, adverse weather events and so forth, because that’s just the nature of it, that you’ve got more flexibility with a better stockpile.

We are addressing that and we are still producing to the guidance that we gave the market in January.

PETRI REDELINGHUYS: Okay, awesome. Thank you very much for your time. I really appreciate the opportunity to speak to you,  and thank you very much for delivering such strong results. I think there are a lot of shareholders who have been very happy over the last two years with your stock. So thank you for that. That was Fleetwood Grobler, CEO of Sasol.

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