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Lockdown restrictions still evident in Sasol operations

Production figures largely unchanged, but prices improve.
The Sasol Synthetic Fuels plant in Secunda, where production has remained fairly consistent. Image: Supplied

While Sasol reported that it continued to see a strong recovery in demand for liquid fuels and gas following the easing of Covid-19 restrictions, the figures show that it still caught the tail end of the restrictions on travel during the last nine months.

The production report for the nine months to end March indicated largely unchanged production volumes in most of the business units compared to the first nine months of the previous financial year when production was severely affected by lockdown regulations. Thus, the one set of figures caught the beginning of the Covid-19 disruptions and the latest caught the last few months.

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The production of fuel at the Sasol Synthetic Fuels (SSF) plant in Secunda was largely unchanged between the two nine-month periods at 24.3 million barrels in the nine months to March 2021 compared to 24.8 million barrels in the first three quarters of the previous financial year. Management reported that SSF is currently running at around 90-95% of capacity.

Jet fuel demand down

However, production at the Natref refinery was still way below where it should be, largely as a result of lower demand for jet fuel from the depressed aviation industry. “Natref production for the nine months ended 31 March 2021 was, as expected, 15% lower than the prior year.

“Jet fuel demand continues to remain constrained and is expected to be below pre-Covid-19 levels for at least the next 12 months,” according to the production update published on Thursday morning (April 29).

Sasol warned that production at Natref will be even lower this year than the revised production guidance issued earlier.

The revised target is some 20% lower than the production in a normal year, based on a look at a few older annual reports.

Management also warns that further Covid-19 lockdown restrictions could negatively impact on its forecast for overall sales volumes.

Production figures from the mining division show a similar trend. Production was largely unchanged in the period under review, with management adding a little bit of good news – export sales increased from 1.5 million tons to 2.1 million tons to take advantage of higher international coal prices.

The gas businesses have also been doing well.

“We have maintained stable operations in Mozambique. Our production rate for the nine months ended 31 March 2021 was slightly lower than the prior year mainly due to lower demand from our Sasolburg and Secunda operations.

“However, we still expect gas production volumes from the Petroleum Production Agreement in Mozambique to be 114-118 billion standard cubic feet, in line with previous market guidance. Natural gas sales volumes in South Africa were 8% higher than the prior year due to higher demand from resellers and customers,” says the statement.

Lwando Ngwane, analyst at Sasfin Securities, points out that one should remember that Sasol’s chemicals business forms a significant part of the company with a contribution to revenue and Ebitda (earnings before interest, tax, depreciation and amortisation) in excess of 50% – even after the partial sale of some of the units at the Lake Charles Chemical Project.

“There has been a major improvement in  base chemical prices which were driven by a better macro-economic environment and that has somewhat offset a lot of the pressure that Sasol realised in the first half of 2020,” says Ngwane.

Lake Charles

Unfortunately, the Lake Charles Chemical Project (now referred to as the Lake Charles Chemical Complex or LCCC) reported lower production than a year ago. “Sales volumes from our American-based assets for the nine months ended 31 March 2021 were 14% lower than the prior year and impacted by the three significant weather-related events.

“Hurricane Laura and Hurricane Delta made landfall near LCCC on 27 August 2020 and 9 October 2020 respectively, while in February 2021, an Arctic winter storm hit both the states of Texas and Louisiana, negatively impacting production across a number of petrochemical sites, including the LCCC,” management reports.

However, it said Sasol was one of only a few chemical producers that was able to keep its ethylene cracker running during and after the storm, which allowed for increased sales during the chaos.

The sale of base chemicals also reflected the divestment of 50% of in the base chemicals business at LCCC to LyondellBasell and the divestment of Sasol’s 50% interest in the Gemini high-density polyethylene (HDPE) joint venture.

However, there was some good news as well.

Sasol reported that the average prices for the basket of chemicals produced price increased by 7% compared to the prior year. In addition, the average sales basket price was 56% higher in the third quarter of the financial year than in the second on the back of “improved demand, market supply shortages due to the US Arctic storm and continued global supply chain challenges due to the Covid-19 pandemic”.

Sasol reported an increase of 4% sales volumes from its Eurasian-based assets for the nine months to March 2021, taking into account the disposal of its share in the Wilmar joint venture.

“No significant supply or production interruptions were experienced at our Eurasian operations during the period. The increase in sales volumes was therefore largely driven by improved market demand,” according to the statement.

In addition, management reported that average sales basket prices improved some 2% compared to a year ago and by 7% in the last quarter compared to the previous quarter.

Large hedging profits

Of particular interest is the last table included in the production report, showing Sasol’s hedging positions and the profit and losses on the hedges. Equally interesting is that management had no comment on this.

The summary of Sasol’s hedging positions shows that it called the oil price wrong. It became something of a mantra at Sasol that the oil price was expected to remain lower for longer. It didn’t.

The table shows that Sasol hedged 48 million barrels of crude at an average price of below $40 per barrel, while the oil price has been sitting comfortably above $50 for the last six months and above $60 for the last three months.

The figures disclose that losses of nearly R800 million have been realised and recognised in the income statement, with another R694 million of unrealised losses being recognised.

But the strategists at Sasol got the rand and chemical prices right, reporting realised and unrealised profits of R3.9 billion for a net hedging surplus of R2.42 billion during the nine months under review.

The future

Sasfin’s Ngwane says the recovery in the demand for liquid fuels and gas in SA after the easing of Covid-19 restrictions should improve Sasol’s financial performance when it reports its full-year earnings. “Additionally, its chemical basket price has strengthened significantly over the past year and especially between the second and third quarter of the 2021 financial year to end June.

“At current spot prices, a lot of the pressure on its balance sheet may be alleviated. But we continue to monitor the macro-environment for direction.

“Sasol’s net debt-to-Ebitda ratio came in at 2.6x when it reported its interim figures, which we still view as a risk to value creation and shareholder returns. But Sasol looks cheap relative to its history, as well as its peers. We expect its cash profile to improve under current circumstances, but we remain cautious given the limited foresight on the impacts of the pandemic on the global economy,” says Ngwane.

Overall, it looks like investors are still rooting for Sasol.

The share price increased to just below its 12-month high of R265 – albeit still way below a few years ago.

Listen to Ryk van Niekerk’s interview with Sasol CEO Fleetwood Grobler on SAfm Market Update with Moneyweb (or read the transcript here):

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