An in-depth look at Sasol’s exceptional 2022 earnings

Sasol posted stellar earnings for their 2022 financial year, quadrupling earnings per share from R14.57 to R62.34 and declaring their first dividend in two years.

Sasol said it benefitted from higher energy and chemicals prices, and cost and capital discipline through the delivery of its Sasol 2.0 transformation programme.

However, some of the benefits were offset by lower volume performance mainly due to the operational challenges experienced in the first half of the financial year.

Sasol reported earnings before interest and tax (EBIT) of R61.4 billion, driven by higher oil prices, refining margins, and chemical prices.

On the back of these strong earnings, Sasol declared a cash dividend R14.70 per share for the year ended 30 June 2022.

In the sections below, we explore the driving factors behind Sasol’s exceptional performance.

South African Operations

The charge in Sasol’s earnings was led by its South African operations.

The fuels business turned back to profitability, capitalizing on the higher oil price and increased demand for fuel as the rest of the country’s refineries struggled to remain in operation.

EBIT for the fuels business grew from a loss of R18.2 billion to a profit of R28 billion.

Fuel sales volumes grew by 2% despite lower production volumes, caused by constrained coal supply and quality, hampering the business.

The coal supply recovered in the second half and Secunda Operations was still able to produce 6.9 million tons, exceeding market guidance of 6.8 million tons.

The coal stockpile has recovered to normal levels of 1.5 million tons.

Sasol CEO Fleetwood Grobler indicated that they will take strategic advantage of the upcoming total shutdown in Secunda to extend reserves to 2 – 2.5 million tons.

Sasol issued guidance for production volumes in 2023 of 7.0 – 7.2 million tons for its Secunda Operations.

Energy Operations and Technology EVP Simon Baloyi indicated that this number can be improved by another 0.1 million tons in years that are less impacted by shutdowns.

Chemicals Africa also saw an improvement to their bottom line, growing EBIT from R7 billion to R24 billion.

The average price of chemicals rose by 29%. The chemicals business also recorded a reversal of impairment to the value of R1.4 billion for its Chemical Work-Up and Heavy Alcohols businesses.

Chemicals America Performance

While all other segments of the company saw substantial increases in earnings before interest and tax (EBIT), Chemicals America did not follow this trend.

Chemicals America’s EBIT decreased from R8.1 billion to R981 million.

It was predominantly due to remeasurements of the divestments of the 50% stake in US Base Chemicals business at Lake Charles.

It included a final scrapping to the value of R2.5 billion, as well a reduction in sales volumes attributable to that stake.

Volumes for American Base Chemicals decreased from 1304 kiloton to 966 kiloton. It means that 2022’s earnings will be the first year that can serve as a good baseline for the reduced stake in earnings.

Sasol expects sales volumes for 2023 to be 5% to 10% higher in 2023.

Grobler indicated that they expect a continued ramp-up, but added that a few of the more specialized chemical units might take longer than others to reach their full potential.

For example, the Guerbet Alcohol unit can take up to 7 years to reach its full potential, suggesting that there can be steady increases in sales volumes for many years to come.

US chemical margins might come under pressure.

The average price of their ethane feedstock rose 86% for the year, causing a compression of Chemicals America’s gross margin from 46% to 39%.

The positive cash flow also means that it will need to start carrying a tax burden, with their effective tax rate going from -11% to 16%.

Chemicals Eurasia

Given the increased shortage of Russian gas and the subsequent spike in European natural gas prices, the Eurasian chemicals business might come under pressure, especially at their facility in Brunsbuttel, Germany.

In response to a question on this matter, chemicals business EVP Brad Griffith indicated that they do have means to mitigate these effects.

This can be achieved through one of their largest facilities in Marl, switching the composition of their feedstock from their supplier more towards coal.

Its Italian operations source its gas feedstocks from Africa, which means it is less affected.

Sasol’s Debt

After the Covid lockdowns made Sasol’s South African fuels business unprofitable, it was forced outside the limits of its covenant with its debtors to maintain a Net Debt to EBITDA ratio below 3.0 times.

In 2020, it peaked at a ratio of 4.3 times. However, Sasol was able to get it down again through accelerated asset divestments and a recovery in earnings.

In 2021 the ratio reduced to 1.5 times and their latest results show a Net Debt to EBITDA ratio of only 0.8, indicating a very healthy balance sheet.

Gearing was also reduced from 61.5% to 41.8%. While total debt increased slightly from R104.5 billion to R106.7 billion, net debt is down to US$3.8 billion thanks to a stronger cash position.

While most of Sasol’s debt is currently denominated in USD, CFO Hanré Rossouw indicated that they might consider rolling this over into Rand-denominated debt as bonds mature in future. This will help Sasol’s debt more closely match their cash flows.

Rossouw also indicated that while they would have liked to see an improvement in their credit rating to investment grade, they are capped by the sovereign credit rating of the South African government due to the majority of their earnings being in Rands.

Asset Divestments

Sasol’s asset divestment program is nearing a close. Here are the latest updates on their divestments:

• Sasol sold its European wax business to the Italian AWAX Group in March 2022 but retains the Fischer Tropsch Hard Wax business that form part of these operations. A gain of R2.9 billion was recorded on the foreign currency translation.
• The divestment of the full shareholding in CTRG, the gas-to-power plant located in Mozambique, to Azura Power Limited for a consideration of approximately R2.6 billion (US$163.8 million) was concluded in April 2022.
• The divestment of 30% of the 50% equity interest in the ROMPCO pipeline for a consideration comprising an amount of R4.1 billion was concluded in June 2022. Sasol retains a 20% equity interest in the pipeline.
• In July 2021, the sale of Sasol’s shale gas assets in Canada successfully concluded, resulting in a gain on the foreign currency translation of R4.9 billion.

Capex

Sasol expects to increase its capital expenditure from R23 billion in 2022 to around R28 billion next year.

The majority of this will likely be earmarked for maintenance, with R21 billion of the R23 billion in 2022 having been spent on maintenance.

This is still significantly lower than pre-Covid levels and while the company needs to be financially responsible with how it allocates capital, funding more maintenance projects is highly likely to improve its hampered production volumes.

CEO Fleetwood Grobler guided that most of the company’s Capex in pursuit of its emission reduction goals is likely to happen between 2025 and 2027.