Sasol Limited (NYSE:SSL) Q4 2022 Earnings Conference Call August 23, 2022 3:00 AM ET
Company Participants
Fleetwood Grobler – President and Chief Executive Officer
Hanré Rossouw – Chief Financial Officer
Tiffany Sydow – Vice President, Investor Relations
Simon Baloyi – Executive Vice President, Energy Operations. Executive Vice President:
Priscillah Mabelane – Executive Vice President, Energy
Brad Griffith – Execitive VP, Chemicals,
Conference Call Participants
Operator
Good morning, and welcome to the presentation of Sasol Limited’s Annual Results for Financial Year 2022. Thank you for joining us today. Our speakers today are Fleetwood Grobler, President and CEO of Sasol and Hanré Rossouw, Sasol’s Chief Financial Officer. In today’s presentation, Fleetwood will cover the business performance for the financial year, which also includes an update of our ESG progress and milestones. The financial performance will be covered in more detail by Hanré with Fleetwood concluding with a brief update on our future Sasol aspiration. You will then have an opportunity to ask your questions in our Q&A session, which commences immediately afterwards. Before we begin, I’d like to refer you to our disclaimer which is summarized on the slide. This contains important information regarding forward-looking statements that are made in this presentation. Please have a look at it in your own time.
Fleetwood Grobler
Good day, everyone, and welcome to our 2022 financial results update. In the last 2 years, we have faced multiple challenges both in South Africa and abroad. The outbreak of COVID significantly impacted the global economy and the world is still adjusting to major supply chain disruptions.
The war in Ukraine now entering its six months has caused enormous upheaval in global energy markets, along with a devastating toll on human life. Inflation is soaring across the globe and recessionary concerns are rising.
In South Africa, the civil unrest of July 21 and more recently, the torrential rainstorms in April this year, largely concentrated in KwaZulu-Natal affected our ability to export products and disrupted our operations. Notwithstanding this backdrop, we remain focused on meeting our short-term targets, while recording progress on future Sasol aspirations.
In this period, we were successful to significantly strengthen our balance sheet through well-executed response measures without the need for the rights issue. We completed our strategy late, accelerated asset divestment program. And today, I am pleased to announce the reinstatement of our dividends to our shareholders.
As in the past years, team Sasol stepped out and delivered in a challenging operating environment. And I express my sincere appreciation for our people’s continued diligence, commitment and support. I also want to thank the Board of Sasol for its continued guidance and support as we take significant strides to a more competitive and sustainable future Sasol.
In recent years, we framed our strategy to the triple bottom line focus of people, planet and profit. Sound ESG performance is fundamental to our business and integral to the delivery of future Sasol goals. within this framework, I will start my presentation by providing a high-level review of financial year ’22.
Maintaining safe operations is our primary focus, particularly considering the tragic loss of five colleagues in the first half of this year. We will never rest in our pursuit of zero harm. We strive to eliminate work-related safety incidents to ensure our employees return home safely each day. Furthermore, our intent to be a force for social good is unequivocal and demonstrated in the many ways we positively impact the economies and support our communities in the regions where we operate.
As our industry is transitioning towards greener solutions, the just transition towards that aspiration is foremost in our thinking. On Planet, our ambition to grow shared value, while accelerating our transition was affirmed through our future Sasol strategy. We defined our concrete plans to accelerate the decarbonization of our business against two milestone dates, 2030 and 2050.
As a reminder, we stepped up our 2030 greenhouse gas emission reduction target to 30% from a 2017 baseline and announced our ambition to be at net zero emissions by 2050. We are making significant headway on our 2030 GHG reduction pathway, as Sasol executes the first tranche of more than 600 megawatts of renewable energy in the next 2 to 3 years. This equates to a significant portion of our energy needs in Secunda and is on an unmatched scale in South Africa.
On the last element profit, we achieved a step change improvement in our profitability this year. While some of this improvement was supported by higher prices, it is also underpinned by a robust cost and capital expenditure performance. These benefits were, however, partly offset by operational challenges in our integrated South African value chains that led to lower production. I’m pleased to report that we have already improved our Synfuels plant output and coal stockpile situation. I will now unpack our financial year ’22 performance further.
The well-being of our people and maintaining safe operations is our number one priority in pursuit of our zero harm ambition. Let me again express our heartfelt condolences to the families and friends of the colleagues we lost, Themba Masilela,, Moses Hlongoane, Takalani Masha, Gansen Naidoo and Lebogang Lebepe.
Any loss of life is unacceptable. Our grave concern for the deterioration in our safety performance was a source of a significant introspection that further intensified our focus on safety intervention. These efforts saw an improvement in our performance in the second half of the year, while we continue to strengthen our safe operation capabilities and practices. As a result, lost workday cases continue its downward trajectory, while our recordable case rate stood at 0.27, marginally above last year’s rate.
We are also addressing a number of actions with a particular focus on operational discipline, training, leadership and culture to deepen understanding of risks. I and my executive team are personally committed to leave no stone unturned as we pursue our zero harm objective.
Another important safety metric we measure among many other things, is the occurrence of fire, explosion and release incidents. This year, we had 13 incidents with a decreasing trend with great ongoing effort to entrench process safety fundamentals. On balance, we are making good progress, but we can never be complacent, and we all recognize the need for relentless commitments on focus and safety.
Our intent to be a force for social good is integral to our business strategy, while our purpose innovating for a better world inspires our journey to realize measurable socioeconomic benefits for communities in our operating regions.
Among a few key examples, we contributed over ZAR 58 billion in taxes and royalties, up 19% from the previous year. With South Africa being our largest tax jurisdiction, we remain one of the top corporate taxpayers in the country. Our total measured procurement spend was ZAR 55.8 billion, of which ZAR 33.6 billion was spent on majority black-owned businesses in South Africa. This is up 40% from last year, demonstrating our ongoing commitment to sustainable transformation and black based economic empowerment.
Our ZAR 1.2 billion investment in skills and development makes us one of the largest investors in South Africa. We continue to fund approximately 600 undergraduate and postgraduate bursaries in financial year ’22 alone.
In the U.S., we support several universities and elementary science, technology, engineering and mathematics or STEM education, as workforce development pipelines are critical to our sustainability and diversity goals. Sasol remains a significant investor in our communities, and I’m very proud of the leading role we continue to play in driving positive socioeconomic change.
Looking at the state of our wage negotiations, we have successfully concluded 2-year wage settlement agreements with our trade union partners both in the petroleum and industrial chemicals sectors. Providing certainty to wage increases is very important to our people and assists with the creation of a more harmonious working environment. Wage negotiations in both mining and Mozambique are ongoing. We remain committed to continue working with our trade union partners in pursuit of amicable agreements.
The plans for meeting our 30% greenhouse gas reduction target by 2030 are progressing well, which will be the real foundation to meeting our 2050 net zero ambition. Significant progress has been made in procuring renewable energy for both our Energy and Chemicals businesses.
In South Africa, we have agreed the key terms with independent power producers to secure over 600 megawatts of solar and wind power to start coming online before 2025. We are aiming to eventually procure 1,200 megawatts of renewable energy capacity by 2030. This represents one of the largest renewable energy procurement programs from the private sector in South Africa and will be a strong contributor towards South Africa’s ambition to implement significant quantities of renewable energy.
In Europe, we entered into several power purchase agreements for our German and Italian operations. This, together with the supply of CO2 neutral biomass-based team to Brunsbüttel is expected to reduce CO2 equivalent emissions by up to 70 kilotons per annum.
On gas supply, we have made significant progress based on our recent infill well drilling activity where initial results indicate that we can optimize our supply profile from existing Mozambican assets to extend our plateau production until 2028. The production sharing agreement or PSA project is progressing well and remains within budget. We are also partnering to pursue adjacent exploration acreage to access more gas. This is a huge step forward and ensures that we have flexibility in our gas supply profile, as we progress our 30% reduction pathway.We are advancing our negotiation on a term sheet for 40 to 60 petajoules of LNG from 2026 onwards. This strategy provides flexibility of our gas supply profile.
Looking at other low carbon enablers, we remain committed to play a leading role in the green hydrogen economy in South Africa. In Sasolburg, the final investment decision for a green hydrogen project was taken swiftly with the aim of producing the first green hydrogen volumes towards end 2023.
I’m also pleased to report that we are assessing creative options for repurposing the Natref refinery. Here, we have completed a pre-feasibility study on a green hybrid refinery concept. This includes the introduction of bio-based feedstock, as a sustainable pathway to transition the refinery to meet the country’s steam fuels compliance standards and reduce greenhouse gas emissions.
Together with our partner, TotalEnergies, we have developed and are implementing now a low-cost innovative solution that will produce clean fuels to compliant diesel towards the end of 2023. This is a very positive step for us and also towards energy security for South Africa.
For our South African value chain, one of the key enablers to achieve our 2030 target is the eventual turndown of cold-fired boilers, which requires a fine coal solution for Sasol. We have recently confirmed the feasibility of a fine coal solution, which enables our integrated greenhouse gas and air quality improvements in our Secunda operations.
The phase shutdown of our boilers cannot be done without the solution for the fine coal feedstock, which we use today to produce steam and electricity required in our operations. Sasol Chemicals in a bid to procure more circular and sustainable products and to produce that at its first sales of sustainability certified products from lower carbon intensity renewable feedstocks from our Marl site in Germany.
In addition, we have achieved ISCC-PLUS certification at three largest of our European sites, namely Marl, Brunsbüttel and Augusta to commence the use of bio-based and circular feedstocks. We continue to make progress on our just transition approach, which includes leveraging existing initiatives and a collaborative approach with partners. Overall, I’m pleased with the progress made, and we continue to accelerate activity towards our 2030 target in a value-enhancing way.
Looking at our environmental performance. In financial year ’22 our greenhouse gas emissions reduced by approximately 7% compared to the 2017 baseline. This significant reduction is to a large extent due to lower production rates from our Secunda and Sasolburg operations. Taking into account the lower production in this year, GHG emissions would be nearly 4% lower from our ’17 baseline showing some progress being made on our mitigation initiatives.
Note that our 2017 baseline has been restated to account for the divestments and is in line with the World Business Council and Sustainable Development GHG protocol. The impact of divestments is not included as part of our 30% reduction commitment. Although GHG emissions will increase with higher production volumes in financial year ’23, we expect continued improvement from existing reduction levels.
However, the larger greenhouse gas reduction will only be realized after 2025 with the implementation of renewable energy, transition gas and phased boiler shadows. Notwithstanding, implementing our reduction levers are not without risk. We understand these risks well. Our teams are working diligently to mitigate the potential impacts, which include from key transmission infrastructure, potential short-term supply chain constraints for renewable energy and gas affordability.
Turning now to our operating environment. In the past year, we were faced with multiple challenges in the external operating environment. But true to the Sasol way, we manage these impacts with greater levels of flexibility and collaboration across Sasol testing the effectiveness of our new operating model introduced last year.
In response, we continued delivery of our Sasol 2.0 transformation program to combat the effects of higher inflation and cost pressures. Following the heavy rainstorms in KwaZulu-Natal province earlier this year, we shifted chemical products from rail to road transport, where possible and looked at alternative loading areas. In Europe, we are evaluating the use of alternative energy sources to mitigate some of the supply impacts caused by the war in Ukraine. We are also working continuously to maintain supply chain channels and alternatives to Rhine River traffic, which is severely disrupted by the lower river levels this summer season.
We continue to engage with all stakeholders in response to regulatory policy changes. Most importantly, the recent proposed amendments to the carbon tax regime in South Africa, which could significantly impact our business. Through these challenging times, we extended comprehensive support to our employees and communities to help employees manage various challenges owing to pandemics, natural disasters, wars and other humanitarian crisis.
I will now touch on a few salient points regarding improvements we continue to report in business profitability. The energy business benefited from a recovery in fuels demand, post the COVID-19 demand impact. This was offset by lower production volumes in Secunda and Sasolburg operations following the feedstock and operational challenges, which impacted our South African value chain.
Our mining operations experienced setbacks in the first half of the financial year, and our productivity and output are lower compared to last year. However, we saw improvement in the productivity in the second half and the coal stockpile restored to above the levels indicated at half year-end.
In Mozambique, we delivered a strong performance exceeding our productivity plan and market guidance on gas volumes. Despite the challenges associated with the pandemic, the infill well drilling campaign is progressing safely within cost and schedule. The Chemicals business delivered a 21% increase in revenue this year, benefiting from a stronger average sales basket price.
Overall volumes were 12% lower than the prior year, largely due to the divestment of the 50% of the U.S.-based chemicals assets concluded in December 2020 and lower South African production.
Sales volumes for our Specialty Chemical business divisions were higher as the U.S. operational ramp-up continues. Still in the U.S., we also completed a successful shutdown of the East cracker in the first half. I’m also proud to announce that we have completed the remaining divestments we targeted, namely the Canada shale gas asset, Ramco shareholding dilution to 20%, CTRG and our European Wax business.
In mining, in line with our zero harm ambition, we are making good progress in implementing our safety remediation program to address the findings from our previous high severity incidents. We are working to restore productivity and maintain healthy stockpile levels. This includes reaching targeted productivity levels across all mines through performance initiatives.
Furthermore, we are executing coal quality improvement opportunities to support optimal Secunda production, including blending, improved mine section deployment and reduced variability through integrated decision models.
Coal quality generally deteriorates over the lifespan of a mine, as operations move away from the higher quality reserves, and this is no different in our case. Mine planning must adapt to cater for deterioration in quality, to optimize the reserves. We are addressing our coal quality improvement through a combination of short and longer term strategies. These strategies may include the procurement of higher-quality coal as a viable lever to balance the total quality considering the integrated margin of our Secunda product slate.
Across our South African fuel and chemical operations, we are focused on improving the effectiveness of our shutdowns and pursuing technical options to improve reliability of our key equipment.
Looking at our international operations, the ramp-up of our Lake Charles specialty units is continuing as planned. The team is working closely with our JV partner in the Louisiana integrated polyethylene JV to ensure stable operations.
We have also appointed a task team to respond to potential gas supply constraints in Europe, which could impact all producers in the region. This includes evaluating alternative feedstocks where technically feasible.
Despite a challenging operational year, we saw a significant improvement in financial performance. I will touch on just a few financial metrics before I will hand over to Hanré, who will share more details.
Our EBITDA increased by 48% to around ZAR 72 billion. The balance sheet was strengthened ending with a net debt of US$3.8 billion at year end, well below the target of US$5 billion. Core headline earnings per share increased by more than 100% to approximately ZAR 69 per share, supporting the resumption of dividends to our shareholders.
This is a huge step forward for Sasol, and we thank our shareholders for their patience and support over the past few years. While some of the improvement is supported by higher prices, it also demonstrates our resilience and agility to continuously adapt to a dynamic business landscape. Our efforts under Sasol’s crisis response and Sasol 2.0 programs have benefited us hugely in this time.
On that note, I will now hand over to Hanré to take us through the detailed financial results for the reporting period.
Hanré Rossouw
Thank you, Fleetwood, and good morning, ladies and gentlemen. It’s a privilege for me today to present Sasol’s financial performance for the 2022 financial year. Having joined Sasol only in April, I’m briefly tempted to take credit for all the highlights of the results. I’d rather though give thanks to the Sasol team for welcoming me on board and also give credit to all the dedication and individual sacrifice made across Sasol over the last years to navigate the company through some very difficult waters.
Let me start the results overview by providing some detail around the macro environment, which was critical to the financial outcomes for the period. Perhaps the overriding takeaway is the level of volatility in the external environment affecting our business with highly significant moves in many of the key benchmark prices. We continue to enjoy the benefit of significant increases in the oil and other energy and chemicals prices. We saw Brent crude increasing by 70% to average $92 per barrel and polyethylene, up 38%.
The Rand remained relatively flat for financial year ’22, but the closing rate was 14% higher, which negatively impacted the translation of our U.S. dollar-denominated debt.
Feedstock prices were impacted with ethane prices up by 86% following the increase in natural gas prices. We expect to see ongoing concerns in the near term around the future security of natural gas supply.
Looking forward, we expect tight global energy and chemicals markets with increased volatility and uncertainty from ongoing geopolitical events and the potential macroeconomic fallout from rising inflation and supply chain disruptions.
Locally, the South African economy is face-to-face with multiple challenges, including high structural unemployment and fiscal constraints, which need to be factored into business planning. These challenges require continued agility and responsiveness in our business. We remain committed to deliver a competitive Sasol through our continued cost and capital allocation discipline and the Sasol 2.0 program.
Turning to the financial results. We have seen a significant improvement in the profitability of our group compared to the previous financial year. We benefited from the strong recovery in prices, which I covered in the previous slide, as well as robust cost performance. These benefits were partly offset by a combination of operational challenges in our integrated South African value chain and supply chain disruptions, which Fleetwood spoke to earlier.
Earnings before interest and tax for the prior year was impacted by non-cash adjustments most notably in the Chemicals America segment, which included the ethylene derivative impairment reversal and gain on disposal of our U.S.-based Chemicals business, as well as in the fuel segment which included the impairment relating to the Synfuels refinery CGU.
Non-cash adjustments for this financial year includes unrealized translation and hedging losses of ZAR 5.2 billion and a net gain of ZAR 9.9 billion on re-measurement items mainly from our asset divestments. On an adjusted EBITDA basis, our profits of approximately ZAR 72 billion was an increase of 48% compared to the prior year with the benefits of our diversified energy and chemicals portfolio evident in the profitability mix.
Core headline earnings of ZAR 68, ZAR 0.54 per share increased by more than 100% compared to the prior period, supporting the reintroduction of dividends to our shareholders with a final dividend ZAR 14, ZAR 0.70 per share. This represents a cash return of over ZAR 9 billion to our shareholders.
Return on invested capital normalized for aspects such as profit on sale and hedging losses increased to just short of 22%. We remain committed to deliver superior returns well above WACC, ensuring a profitable and sustainable business in the future. The management of risk remains key, and our stronger balance sheet will allow us to significantly reduce the need for hedging going forward.
Let me now turn to the segmental highlights, starting with the Energy business. Our Mining segment benefited from higher export prices, resulting in a 3% increase in adjusted EBITDA compared to the prior year. This was partly negated by a combination of lower volumes following the operational and safety challenges, as already mentioned, as well as higher external coal purchases.
Our gas segment made good progress with the Mozambican drilling campaign. Adjusted EBITDA was up by 2% compared to the prior year, supported by higher gas prices, as well as higher production volumes.
Our fuel segment delivered a strong performance with adjusted EBITDA increasing by more than 100% compared to the prior year. We benefited from higher crude oil prices, refining margins and higher sales volumes on the back of improved demand.
Turning to our Chemicals business, our Africa segment was impacted by a combination of production challenges at our SA sites in the first half of the financial year, as well as supply chain disruptions, which affected the export of products in the second half. However, the average sales basket price for the financial year was 29% higher due to a combination of improved demand, higher oil prices and tighter global supply conditions. This resulted in a 44% increase in adjusted EBITDA.
We have seen a strong ramp-up of our specialty chemicals in our Chemicals America segment as more products are being certified for use by our customers. Adjusted EBITDA increased by 72%, benefiting from the 58% increase in the average sales basket price. This was offset by lower sales volumes following the base chemicals divestments and the unplanned West [ph] cracker downtime in the last quarter of the financial year.
As I’ve mentioned, ongoing geopolitical tensions, inflationary pressures and increased recessionary risks will continue to impact our business and the priority is to effectively manage the elements that are under our control. In terms of the guidance for the 2023 financial year, we expect generally stronger performance in our Energy and Chemicals businesses. We anticipate productivity at our mining business to improve compared to financial year ’22, as we focus on operational discipline and continue to prioritize the safety of our workforce.
In our Gas segment, we expect higher production volumes as we start seeing the benefits of the exploration and infill well drilling campaign. Our South African liquid fuel sales volumes will increase to a range between 53 million and 56 million barrels on the back of improved operational performance and higher fuels demand.
With the anticipated improvement in mining productivity and operational stability, Secunda operations will produce higher volumes of between 70 – apology 7 to 7.2 million tonnes. This includes the impact of the full shutdown plan for September of this calendar year.
Turning to our Chemicals business, sales volumes for Chemicals Africa is expected to be between 6% to 12% higher compared to the prior year, following improved operational performance and recovery from supply constraints, which we experienced in the previous year.
In Chemicals America, we expect sales volumes to be between 5% to 10% higher than the prior year, as Lake Charles continues to ramp up. Chemicals Eurasia, the sales volumes are expected to be up to 5% higher, mainly due to improved market demand. There is, of course, some risk to our Eurasia business forecast, as Fleetwood have highlighted.
I’m pleased to share the ongoing progress we are making with our Sasol 2.0 transformation program which aims to ensure that we remain competitive and profitable even in a low price well environment. Looking at our performance for this year, we realized ZAR 4.2 billion in net sustainable cash fixed cost savings, well above our target of ZAR 3 million. This was partially offset by higher costs as we introduced employees short-term incentives and other shutdown related expenditure which was not in our financial year ’20 base. The benefit of these savings is evident in the income statement, as we managed to contain cash fixed costs to a mere 2% increase compared to the prior year.
We saw a ZAR 2.6 billion gross margin improvement above our target of ZAR 1.5 billion through initiatives such as feedstock optimization and debottlenecking of our plants. Capital expenditure remained within our guided range of ZAR 20 billion to ZAR 25 billion in 2020 real terms. This was delivered through our risk-based capital allocation approach, which includes initiatives such as preventative maintenance and developing alternative low capital and non-capital solutions. I will provide more detail on capital spend on the next slide.
Our working capital ratio was slightly above our target, mainly as a result of higher valuation of inventory and receivables following increased prices. If we extrapolate for turnover for the last quarter of the financial year, though, the working capital to revenue ratio was up 12.3%. Given the volatility, which has played out over the recent years, we are revisiting the measure of 14% working capital to turnover ratio at period end and considering embedding a more sustainable average throughout the year.
As we enter the new financial year, we will continue to focus our efforts on strict cash fixed cost management and further increasing our gross margin through operational improvements and realizing best practice through market-driven strategies.
Based on the current pipeline of ideas and initiatives, we are confident that we will maintain momentum in achieving the 2.0 targets for the upcoming financial year and beyond.
We continue to prioritize capital spend to enhance returns, protect our license to operate and ensure that we have a safe and reliable operations of our business. Our capital expenditure of ZAR 23 billion for the financial year was in line with guidance, but higher than the previous year, as we deferred capital expenditure due to cash preservation measures.
Looking at our capital forecast for the new financial year, our maintained and transform capital will be slightly higher compared to this year, but still in line with our capital guidance. sThis is largely due to the PSA drilling campaign gaining momentum and the planned full year shutdown of our Secunda operations. As we progress our 30% greenhouse gas reduction program, we will start incurring more transform capital. To date, spend was limited to minus study costs. Here, we expect to spend between ZAR 500 to ZAR 1 billion in financial year ’23 with peak [ph] spend forecast for financial years ’25 to ’27.
Going forward, our key capital targets remain unchanged to transform and maintain capital of ZAR 20 billion to ZAR 25 billion per year in real terms. The aggregate capital for our transformation road map of between ZAR 50 million to ZAR 25 billion up to 2030 is included in this annual spend guidance.
Our capital allocation framework shared in 2021 is aimed at balancing the delivery of our long-term strategy, our climate change ambitions and growing our shareholder returns. Our first and second order allocation principles ensure that we prioritize our maintained and transform capital to continue operations well into the future, whilst the robust balance sheet will support a sustainable dividend based on a 2.5 to 2.8 times cover of Core HEPS.
Growth opportunities. both organic and inorganic, will then compete with additional shareholder returns in a disciplined fashion to optimize risk-weighted returns on the portfolio. Our accelerated asset divestment program is now complete and delivered over ZAR 50 billion of proceeds. This has significantly contributed to our deleveraging success and reduced net debt to a more comfortable level for the business. Our hedge cover ratio has reduced significantly from financial year ’22 to ’23, and we now expect further reduction of the cover ratio as we have reduced the need for downside protection.
To support our 2050 ambition and the new value streams being pursued throughout the business, we are in the process of establishing a small venture capital fund aimed at investing in start-up and early stage technology in the green economy. This will also support our internal research and technology capabilities through which we believe Sasol can make a significant global contribution to innovating for a better world.
In conclusion, I would like to emphasize the great progress made towards our financial objectives in a very challenging environment. Our group profitability and financial position has improved dramatically over the last year. Favorable macroeconomics have helped us, together with focused and well-executed plans and a strategy which will preserve and grow long-term value.
There is, of course, much more to do, but there is also little doubt that we have created a stronger platform. Our shareholders have been patient in foregoing dividends over the last few cycles. And today, we are proud to announce the resumption of dividends on the back of a much stronger balance sheet. We are committed to maintaining a dividend which is sustainable going forward.
We have a clear transition target to 2030, which includes a self-funded transition, and we have full confidence in delivering the first 30% greenhouse gas emissions reduction by 2030 through well-defined levers. Beyond this, we will balance capital allocation of growth projects, which make economic sense with acceptable risk and shareholder return options. We will prioritize more impactful investments over time which provide healthy and consistent returns which are commensurate with the risk.
Thank you for listening, and I will now hand back to Fleetwood for the conclusion.
Fleetwood Grobler
Thank you, Hanré. As we look to conclude the presentation of our year-end results, I will now shift the focus to future Sasol. As we accelerate plans to meet our 2030 GHG reduction target, we built the foundation for achieving our 2015 net zero ambition. In this regard, we continue to progress the techno economic studies on the pathways considered for 2050 with more detail being developed.
Our GHG emission reductions will be achieved through transformational pathways that could also include conscious decisions to cut back production in parts of the business. We could, for instance, see our Secunda production slate shifting fundamentally beyond 2030, depending on demand profiles for energy products in the longer term.
We are also playing a leading role in coastal green hydrogen export through the Boegoebaai opportunity. Through a memorandum of agreement with the Northern Cape Development Agency, we are leading the prefeasibility study to explore the potential of Boegoebaai as an export hub.
Sasol ecoFT, which aims to provide sustainable aviation fuels or SAF and related feedstocks for chemicals, using our own proven Fischer Tropsch technology has seen significant interest in the recent period. SAF remains one of the most promising pathways for the hard-to-abate aviation sector to decarbonize in future.
The SAF drop-in offering is [Technical Difficulty] Our sincere apologies for this power failure we experienced, I think we need more renewable energy earlier. Let me continue. The SAF drop-in offering is an attractive aviation fuel solution and the market is expected to grow massively in the years to come.
We are refining our go-to-market strategy and entered into multiple collaboration agreements with venture partners, feedstock suppliers, aircraft manufacturers and other service providers to firmly position Sasol within the developing SAF market.
The Lake Charles ramp-up continues to be a focus area in the short term. But beyond that, we believe the site provides multiple attractive opportunities through co-location and expansion as a sustainability app with partners. We are also bolstering our research and technology capabilities to support the development of emergent and new green technologies needed towards 2050.
Green Technologies will not only contribute towards Sasol net zero plans, but also play a critical role in the broader societal move to net zero through application of our technologies. An example of this is the recent Sasol and LOTTE Chemicals collaboration to develop materials for electric vehicle batteries where lithium ion batteries are likely to be the key power source for electric vehicles in the future. As mentioned by Hanré, the venture capital fund we are establishing will facilitate funding advancement of new technologies through start-up opportunities.
Now looking ahead, there are several key areas where we must maintain our relentless focus to continue delivering on our ambition to grow shared value, while accelerating our transition. First and foremost, we must achieve zero harm for our people. Also important will be to progress our climate change and broader ESG goals, which is fundamental to our long-term sustainability.
We will build on the excellent progress made this year to drive further execution of our 2030 road map. In addition to this, maintaining operational stability and focused volume improvement will ensure that we maximize value from our well-invested assets. Moreover, delivering on our Sasol 2.0 targets will position us to be sustainably profitable and competitive in a lower oil price world. Delivery of these goals will enable the business outcomes to ultimately provide sustainable shareholder returns.
This concludes our results presentation for today. Hanré and I thank you for watching. We will now take a 5-minute break before we commence with a question-and-answer session, which Tiffany Sydow from Investor Relations will facilitate. Thank you.
Question-and-Answer Session
A – Tiffany Sydow
Good morning, and welcome to the question-and-answer session related to Sasol’s financial results announcement this morning. My name is Tiffany, and I’ll be facilitating the question-and-answer session today. With us in the room, we have Fleetwood Grobler and Hanré Rossouw. And on my right, we have the rest of the Sasol executive management team. Welcome to the session. Your questions can be posted online on the right-hand side of your screen, you should see a dialogue box where you can input your question. Please submit any questions you have via this. Alternatively, you can also dial in to Chorus Call and verbalize your question today. I’ll be switching between the two during the session to ensure that all questions are adequately addressed.
Turning to our first question for the day. Excited by Sasol’s initiative to start a venture fund. Is there a capital target for the venture? And by when will the ventures start operating from [indiscernible] at NBV Investments. Hanré, over to you.
Hanré Rossouw
Thanks, Tiffany. I share the excitement. I think the venture capital fund that we are targeting gives us the ability to innovate also outside of Sasol, and I think it links nicely to the research and technology work that we do. I’m going to keep you in suspense. We are hoping to launch that later this year. We’re finalizing the funding and governance aspects of that. But hopefully share some more news on that before the end of the year.
Tiffany Sydow
Thank you, Hanré. I think sticking with the theme of financial results. Could you please shed some light on your oil price hedging strategy, given the risk that oil prices could come down in the event of a global recession from Richard Middleton at Excelsia Capital. And I think if we can go in to the next question as well, what would be the criteria for Sasol to consider a blend of share buybacks and dividends going forward from [indiscernible]
Hanré Rossouw
Thanks, Tiffany. I think the overarching aspect for both questions are the capital allocation framework and risk management structure that we have. And I’ve got to first just declare my personal allergies to hedging. I think it’s important to not look at hedging in isolation, but important as part of a broader risk management aspect of the business. To that extent, we had excessive hedging, you could say. And then the need for hedging given our previous significant debt on the balance sheet, if we go back to 2020, we had over ZAR 10 billion of debt. And at that stage, we had around the 70% cover of our oil production.
Given the significant reduction in gearing, operational gearing has also improved. We now see a lower need for gearing or for hedging rather. And we’ve reduced the hedge cover of oil to around 45% for the 2024 financial year. And that also now has a slight change in approach where previously, we used the zero cost collars, we are now using more put options, really just to buy the downside protection in the event of a severe drop in oil prices, which could come from a global recession.
In terms of buybacks and dividends, again, we referenced the capital allocation framework. And really, thereafter the allocation of capital to maintain and transform and paying the base dividend, the excess cash then will either going to growth capital, as I mentioned, both inorganic or organic or be returned to shareholders. And to that extent, we’re happy to consider both buybacks and special dividends. We’ve not given any guidance yet on the balance of buyback and dividends through which we will consider, but we will consider that given the specific circumstances at that time.
Tiffany Sydow
Thanks, Hanré. I think moving over to operational and business outlook questions. I’m going to direct these next two questions to Fleetwood. The mining productivity guidance of 1,000 to 1,100 tonnes per CM per shift is well below my understanding of targeted levels of 1,200 to 1,300 tonnes per CM per shift. What is constraining the ramp-up in mining activity and that comes from Wade Napier at Avior?
And the second question around LCCP, what was the capacity utilization at LCCP during FY ’22. What will normal capacity utilization be? And when do you expect to reach the systems from Victor Seanie at Benguela global [ph]
Fleetwood Grobler
Yeah. Thank you, Tiffany. Thank you, Wade, for the question. So let me just position first that our mining productivity guidance that we’ve given at half year-end, that was attained through the second half of the year. And our outlook now is building on that guidance. So I think what is underpinning our targeted mining productivity improvement is, first of all, our safety remediation program. So that is the bedrock of our mining operation. And so I would be loath to indicate any higher numbers before we haven’t solidified our safety foundation and that remediation program.
And it’s also about you can’t mixed signals to your mine workforce to say what is now the priority? Is it now first safety recovery? Or is it production productivity? And so I think the message is clear. We’re going to remediate the safety, we’re going to set the realistic targets where we can build from over the last six months delivery, built from that going forward, but in a very measured way, making sure that safety is the primary focus during that ramp-up of productivity.
As far as the second question with respect to the capacity utilization of LCCP in the past year, I think from the outset, we have made it very clear that the different sections of the plant will see ramp-up targets. So we are clear that our base chemicals portion of the 50% that we remain have – that we are owning now as a result of the divestment. That one is is more a commodity business and the ramp-up, of course, will be through the 3 years period, which is now being attained through that. And so there is a capacity utilization of 90% plus in the various units. I won’t go into the details.
And we have had towards the end of the last quarter, also some setback in the cracker where we had some equipment failure that has to be rectified. Also this is not anything unusual as you start up a new plant, you go through the bathtub of reliability issues. And you sort that out and then get stable reliability operations. So as far as the base chemicals part, I think we’re tracking well.
When we look at the other parts of the specialty, we also indicated very clearly to the market that we will have a 5-year for our differentiated commodities and products that we do. So for example, most of the ethoxylation [ph] ETO products MEG, ethylene oxide, as well as the Ziegler for more into that category, which is a 5-year ramp-up. And there, we’re tracking very good.
So we are meeting our targets. So this is now in year two that we’ve completed. So we’re going into the year 3 and I think we’re tracking in the specialty chemicals, where we look at the Guerbet alcohols and the very specialty surfactants that goes for example, in oilfield chemicals, applications. Those are one a 7-year trajectory of ramp-up. And we are also following that at the moment.
So I must say, overall, you can’t put one number down. You need to look at the various products and the applications. But I am happy that we track on that basis, and we can engage into discussions to give you more granularity as we unpack the results in the next week.
Tiffany Sydow
Thank you, Fleetwood ito. There are a few questions that are queued via Corus Call. If I could move over to the operator, please, and perhaps we can start with the first 2 [indiscernible] and then moving on to Adrian Hammond from SBG.
Unidentified Analyst
Good morning, is the line open.
Tiffany Sydow
Yes, we can. Gerard go ahead.
Unidentified Analyst
Thank you. It’s nice to, as you say, verbalize questions again. Thank you for that. I got three questions, if I may. The Synfuels production, I mean, let me start saying that in FY ’19, you had a 2-phase shutdown that you were producing at 7.6 million tonnes. So the Synfuels production guidance is way below weighted over 7 million to 7.2 million tonnes. Why so low? Is it just because of the coal quality. And when do you expect in Synfuels to be producing at optimal levels again? I guess that the first question. Can you give us more detail on your procurement of LNG, the world of LNG has changed significantly since Russia invaded Ukraine. How are you progressing. And can you give us a sequence and timing of events that that needs to happen in terms of FIDs on the Synfuels additional need performance, the building of the recast [ph] or construction of the recast facilities, et cetera.
And then just the last question. You increased your assumptions for RAND oil [ph] your long-term assumptions that looks in the AFS by about 40%, yet your fuel producing businesses remain impaired. Does it mean you’ve included additional negative items to offset the increase in the long-term assumptions or why have not reverse those impairments? Thank you.
Tiffany Sydow
Thank you, Gerard. Fleetwood, if you could start with the first two questions.
Fleetwood Grobler
Yeah. Thank you, Gerard. So the three questions. I will commence with the first two, and I’ll also ask Simon and Priscillah to weigh in on that. And I think Hanré can deal with the last question then.
So first of all, the guidance that we’ve given for the Synfuels volume output is informed by a number of areas. First, we are recovering from our previous year. And as I mentioned, with the mining productivity, we are on a trajectory to improve. And so the guidance must be see in that light that it’s realistic building up on a volume base going forward. And so that’s the one aspect.
The second aspect, which is the full shutdown, as well as a phase shutdown that we have this in Secunda. That’s a rent that’s almost every 5 years, but that adds an additional limitation on volume output in Secunda. So I will ask that Simon also weigh into that. And then as far as the LNG goes in terms of the progression and where we stand. Let me ask Priscillah to weigh in first over to Simon and then takes the gas question, Priscillah please.
Simon Baloyi
Thank you Fleetwood. Good morning. It seems like every time we speak, myself and you we speak about the total shutdown. So remember a day where we were in Secunda and we had to put 4 bottles of water and we’re demonstrating how to do face and a total shutdown.
So you indeed correct this year, our guidance is related to that, we will be taking a phase total shutdown, which starts, coincidentally, this Friday. And that will go on until around the 24th of September, the total portion of the shutdown should come back around 12 to 14 days. And then I think that guides how we then sing around 100 to 200 kiloton less. And then as you know, when we started the Murray [ph] campaign for FY ’22, and pushing off ’23, we did give guidance that we don’t have as much gas as we would like to have. So that also does have an impact of around 100 to 150 kilotons.
So taking all of that into consideration, I suppose, post FY ’24, we should be retaining during the face times to around 7.6. And when you have a total shutdown will still remain between 7.5.
Fleetwood Grobler
Thank you. Priscillah?
Priscillah Mabelane
Thank you. Hello, thanks for the question. So perhaps before I get into LNG, it’s appropriate to just give an overview of where we are overall, and I guess sourcing strategy because it’s actually a portfolio of both our exploration and development projects, as well as LNG. And it’s quite important as we move forward that we actually balance the two.
So we are actually making good progress in terms of our overall portfolio you’ve seen today. Earlier on, we’ve announced the extension of the plateau to 2028. At the back of that it gives us flexibility in terms of how we bring LNG on board, yet at the same time maximizing the exploration and development of quite a few of our projects that we are already working on.
In terms of LNG, we are targeting to finalize the term sheet by end of this year. Again, it’s quite important that we reach the right commercial terms before we commit ourselves. We are in intense discussions and negotiations with our partners that will enable us to probably take about six months or eight months to complete and finalize the FID so that we can start with the construction.
We are also discussing timing with them, particularly given the fact that we’ve got now two more years flexibility. So the original timeline was Bo of 2026 and we would like to create some flexibility as we engage going forward.
What is more critical for us is to ensure that the infrastructure in Maputo [ph] actually built more than the actual contracting of the molecules. Hopefully that gives you a good clarity of where we are.
Hanré Rossouw
Thanks and if I can jump in then,, just on the on the impairment or your question around whether the stronger oil prices in the assumptions could not have led to a reversal of impairment. There’s detailed disclosure on the impairment assumptions, in note nine of the annual financial statements. And you’re absolutely spot on that we did, of course, increase oil assumptions on the back of what could be short term tightening of the oil market.
So in terms of our assessment of the carrying value of our assets, we did have to take into account that this could not this potentially wasn’t a structural change that could be long lived. And it’s also offset then by other assumptions that have had a negative impact on the valuation. And I think, to that extent, we’ve highlighted carbon tax and the proposals or so now, as a measure that that could detract value on that, on that carrying values.
On the basis of sensitivities, we’ve assessed and got to the conclusion that there is no need at this point to reverse impairments. But of course, we will continue to do the assessment on an annual basis.
Hanré Rossouw
Thank you, Hanré. Sticking with Cora Call, I think we had Adrian Hammond next in line. Adrian, please go ahead. Unfortunately, Adrian’s line has dropped. Great, thanks, can we? Can we move to Chris Nicholson, please? Hi, yes. Good morning. Thank you for the call in person again, I hope you can hear me.
And my question is around the European chemical business. I’m sure as many are pretty worried about what’s happening in the European gas markets. Could you can you tell me what happens if Germany moves to stage three? What would the impact be on new European chemical businesses in Germany and Italy, or in Germany and Pacific and then also maybe just some guidance on where you see margins heading in that business? I mean, it would look from the – from the scale of feedstock cost increases that they could be hitting negative, what are your options in that instance? Thank you.
Fleetwood Grobler
Thank you, Chris. I’m going to ask Brad to weigh in on that. Suffice to say that we have got a number of different, you know, situations from north to south Germany and to Augusta and southern part of Italy and Sicily. Because the sources of gases different one – one is supported from Africa, the others are dependent on Russian gas. But none notwithstanding, I think we’ve got a very clear understanding of the levers that we need to watch out for. And I’m gonna ask Brad to weigh in on that.
Brad Griffith
Yes, happy to do that. Thank you for the question, Chris. As Fleetwood said, we’ve got a task team working on our response to the reduced gas supply as our do all of our industry partners in the region. As for Italy, let’s start there. First, I think we’re well placed to be able to continue our operations we have the portfolio of gas supplies, as well as liquid fuel options to be able to continue those operations.
In Maril, our large site in central Germany is actually fed by our host company Evonik. They’ve announced publicly that they’re intending to restart their coal fired power station and steam generation as well as switch some of their natural gas consumption over to LPG in line with the government’s guidance on the on the gas network.
For Brownsville, we we do have options as well, we’ve been working on liquid fuel choices. One of the unique things about the principle site is that we also provide heating, Steam, low pressure steam to the community of principle. So we’re expecting to be able to continue to receive natural gas to some degree there.
I think if you look at some of the latest public information from from the German government, they do sit at a higher level of storage than what they normally would be. That’s obviously a concern whether they continue to build that up for the winter. And we all continue to monitor that.
In terms of your questions on margins. Certainly margins are under pressure. If you look at daily gas prices, it does put pressure on some of our operations that are large gas consumers. And so we work with our customers to see what can be done to be able to pass that on. And we’re making choices as Fleetwood mentioned earlier on alternative energy supplies, but also looking at alternative sources of feedstocks, and where necessary, we will moderate rates and that’s why we gave guidance for fiscal 23. That was a bit wider than usual showing zero to 5%. Because if we continue to see the pressure on gas, then we potentially would be making some choices on how much volume we produce.
Tiffany Sydow
Thank you, Brad. I’m going to switch back over to the online platform. There are a few number of questions coming through on the operational theme. There are a few questions around Mozambique gas or cluster those together. The first one comes from Adrian Hammond at SPG. If the plateau is extended To 2028 why is LNG so needed by 2026? Synfuelds volumes were historically six, seven point 67.8 That SASOL envisaged return to this level, I think some of that has already been covered by Simon. What is the current bottleneck?
And then also on gas? There’s another question from cm [indiscernible] how he thought addressing the sharply declining gas reserves in Mozambique and what solutions have you looked at and how much CapEx is expected to be spent? Are these enough to fulfill Salsol needs while the company transitions to green hydrogen fleet? Good if we could address that.
Fleetwood Grobler
Thank you, Tiffany. And I think we have basically addressed the gas play in Mozambique. Priscilla has touched on that. So I can only add to say that, you know, we would continue our efforts to look at what are the opportunities in our near fields that we operate and within our field, so we had very good success with this info well drilling campaign. So we excited about that. And that that informed also the extension of the plateau. And so we will do more work and more drilling. And in that regard.
Moreover, we are busy with a psi implementation project. And that will also assist us to think about is there any excess gas that can be committed beyond the need for the Mozambican in country power station, that would be the first taker of the volume of gas over the period that was committed.
But we also know that if we have more gas, we we’ve got an opportunity to bring that gas to South Africa, and we are busy finalizing all of those agreements with the Mozambican government, but they are willing to help us out on that basis.
But I think, you know, the options of gas is a key focus for the energy team. And Priscilla has indicated that they want to create optionality to not only think about our own fuels, but also the LNG and other adjacencies that we may be harvesting in our own area. So I think that that is a good, good summary, I think of where we are.
Tiffany Sydow
Thank you fleeted. I think the next question comes around the current [indiscernible] gas prices, any challenges in enforcing the current NASA maximum gas price that suggests prices could be more than 90% higher?
Fleetwood Grobler
I think the the situation was no sound. Thank you, Herbert. We have been engaging with nurses since the first quarter of this year, to finalize within the framework of the maximum gas pricing mechanism to come through on a on a price that would be realistic in today’s environment, given that the maximum gas price would have been 270 Rand per Giga joule. But we did not think that is realistic.
We have proposed a different price level we’ve engaged with NASA. And at this point in time, we haven’t finalized that with NASA, we have indicated that we will not implement this price announcement that we mentioned in August. And we would like to resolve that with NASA. Because in the end, that is what they have to assess is the rationality test for a realistic price. And that we will then once we’ve come to that agreement, we will take that forward with our customers.
And I can only say our customers and Sasol are both in all honesty waiting for that engagement so that we’ve got certainty of what the rest of the year would hold in within the agreed pricing framework. That was agreed already last year with no sir.
Tiffany Sydow
Thank you, Fleetwood. Another question from Hubbard Caribbean on the impact on mining productivity higher than average rainfall is expected this summer, could we see more of the same or lower productivity in mining and consequently Synfuels? Is this unavoidable without contingencies in place?
Fleetwood Grobler
Yep. Thank you. Thank you for that question. I think first of all, we have indicated that one of our mitigation levers to have a writable coal supply is our stockpile level. Now, in the last year, this time, our stockpile level was not in a very healthy level. And when the rainy season started, that exacerbated our ability to maintain stockpile level.
I think this year we’ve got a very different approach. We will maintain our stockpile level well above the 1.5 million tonnes. As a matter of fact, as we go now into the Synfuels shut down there Simon referred to that will last us to the end of on the last week of September, we will make a by increasing the coal mining to the stockpile, so that we bolster that 1.5, maybe to a range of two to two and a half million tonnes or beyond. So that when we enter into the rainy season, that we’ve got more security through stockpile measures, and that we can mitigate that event.
Tiffany Sydow
Thank you, Fleetwood. A couple of financial questions coming in Hanré, we can set the first one from Adrian can settle rich investment grade credit ratings, and detach from the sovereign rating. And then I think another question on the CapEx outlook from also from Adrian, what is the group CapEx outlook in nominal terms for 24, 25, please, and what is the future hedging ratio we can expect?
Hanré Rossouw
Thanks to the in terms of investment grade ratings, unfortunately, at the moment, the rating agencies does tassels raking to the sovereign. And unless there’s a significant increase in offshore profits in the region of 50% plus, unfortunately, the sovereign, its sovereign grade credit rating will always be the ceiling for the company. And we’ve been engaging with the with the various rating agencies on that. But unfortunately, that is that’s just how things work at the moment. In terms of group CapEx outlook, in nominal terms, I think you can you can safely apply a get a four 5% inflation impact to the 20 to 25 guidance. We are very comfortable that the kind of next year that I’ve mentioned, we will be in line with that guidance. And so certainly 2425 as well, it will cover not only the sustaining of our business, but also the transformation needed the 15 to 25 billion rand that we’ve got to spend to 2030 to meet up our greenhouse gas targets. And the the hedging I think in terms of hedging. As I’ve mentioned, the hedging does cTOome down to around 25% for financial year 24 In terms of oil, and it will continue to continuously reassess that level. I think it as I’ve mentioned earlier, it’s a function of the operational gearing that we expect in the business. The financial gearing is particularly around our absolute and net debt level. And we will do detailed Monte Carlo analysis of sensitivity to the various outcomes that relates not only to oil, but also more, more particularly on the RAND Rand dollar exchange rate as well, as well as Ethan and on coal. But in general, given the stronger balance sheets have mentioned, we do expect the hedging levels to be more around the lower levels that we’ve seen ’24.
Tiffany Sydow
Thank you, Hanré honry. And while you are on the mic, another two questions around debt. One comes from Adrian Hammond again at SPG. Ken Cecil, a sorry, what is the group? Sorry, I’ve already covered that one. The debt profile comes from stellar credit Pockys. The debt profile shows a spike of 2.8 billion in FY 24. Could you give me your current thoughts and on future funding and refinancing strategy? Do you plan new bank loans or visit to the bond market as part of the strategy?
Fleetwood Grobler
Thanks. Thanks, Tiffany. So I think in terms of, and this is where I’d love to take credit for the fixing of the balance sheet. But I said I’ll not take credit for anything today. But the balance sheet isn’t very rude health. I think, as we’ve mentioned, we’ve got a net debt level at a period of 3.8 billion US dollars. On a gross debt level, we had six, just over 6 billion US dollars. Effectively, all of our debt is US dollars. So in terms of refinancing strategy, the key focus is to shift more of that US dollar debt into Rand denominated debt that will better match up our cash.
The cash generation. In terms of refinancing, yes, we’ve got 2.8 billion in financial year 24. That relates to a term loan and a US denominated bond. And then we also have in November this year, another billion dollar bond that needs to be refinanced. We’re very comfortable that there’s a range of options to refinance that we’ve got the RCA facility that we can very comfortably use as a bridge we can use existing cash flows. And then we’ll look at other instruments as well as alternatives. So not losing sleep, luckily at the start of this farm on the balance sheet, thanks for that question.
Tiffany Sydow
Thanks, Hanré. I’m going to move back to Chorus call and take two questions from Alex Coma and session Lanka. Operator, can you direct a question? Please?
Operator
Alex, your line is life?
Q – Unidentified Analyst
Yes. I’ve got a couple of questions. First of all, just on this gas LNG situation with the LNG prices is very high at the moment – at the moment. Is there a point at which you decide not to go down that route? And just cut to kind of production to make your 30% target? Or are you determined to go ahead, regardless of the economics? First question.
Secondly, just on that track, I see on your presentation, you talked about turning just to a green refinery. So its decision been made to keep them open and what level of CapEx will be required in order to meet the new fuel regs. And then my final question is in terms of the dividend, the 2.5 to 2.8 times cover, how should we think about the levers to pull back down to the lower cover ratio? Thanks.
Tiffany Sydow
Thank you, Hanré if you could address that.
Hanré Rossouw
Let’s start with the dividend. As we’ve highlighted the capital allocation framework incorporates our dividend policy, which relates to a 2.5 to 2.8 times cover of Core HIPS. I think important perhaps just to note that Core HIPS excludes any any funnies that excludes any hedging, hedging losses or gains. So we make sure that the – that the investors get the full the full benefit of the of the cash generation of the core business.
To that extent, we said that will – will go to 2.5% or 2.5 times cover, if the net debt levels dropped to below $4 billion in absolute terms, we briefly, we’ve obviously hit that now briefly at the period end. But we will, we will want to see that sustained throughout a period to lower that cover from the 2.8 to 2.5. Beyond that, as I’ve mentioned, we will also return excess cash to shareholders through metrics who aspects such as special dividends or buybacks.
Tiffany Sydow
Thank you, Hanré.
Fleetwood Grobler
Thank you, Alex. So I’m going to address the nitric question. And I’m going to ask Priscilla to weigh in on the LNG options that we look at. So, Alex, I believe we have announced probably a couple of years ago, what is the capital requirement for getting NATEF clean fuel compliant, which was I if I recall, I’m not sure it was for 4 billion plus, at that time arrange we given arrange to the market.
Now we have achieved two things in the pre feasibility study and operational review with our partner TotalEnergies, first of all, we have come up with a very creative way to get nitric output clean fuel compliant on diesel for a very low investment. And I think this is I’m not going to mention the amount but it is within the operational expense rehomes that you can achieve that and that we will then be ready for by towards in ’23. That means in next year, and on the petrol side and jet on the on the team fields there. That is a solution that we are looking at. And I’m not going to give you the price, or the cost range today because it’s a pre feasibility type of quality that we busy with, but all I can say that it is substantially substantially lower than the previous Clean Fuels cost. Okay, CapEx that we’ve signaled to the market. And we will come back hopefully within the next six months to get further clarity on that specific amount.
Tiffany Sydow
Thanks, Fleetwood. Alex, good question. The simple answer is no. We want to it at all costs. But having said that, let me elaborate a bit. We are looking at a portfolio. As I’ve mentioned, we are targeting a blended price of gas going forward, which needs to break even with 10 down solutions, we do recognize that there will be some dilution, but we caught critical for us that we continue to deliver the right return to our shareholders. So that balance is going to be quite critical. So that’s what we’re working towards. We also mindful for the South African Inc, as well, because there are industries that are going to require guests going forward. So we’re hoping that there will be a predictable regulatory framework that ensures that of September. The 2% of the shutdown will come back around, I mean, 12 to 14 days. And then I think that how we see around 100 to 200 kilotons less. And then as you know, when we started the Meryamin for and a portion of 23, we do give guidance that we don’t have as much gas as we would like to have. So that also does have an impact of around 100 to 150 kilotons. So taking into consideration, I suppose, post FY ’24, which will be retaining during the phase time to around 7.6%. And we have a total chart done will still remain between 7.5 billion.
Priscillah Mabelane
Question. So perhaps before getting to LNG, it’s appropriate to just give an overview of what we are overall gas strategy because it’s actually a portfolio of course, our exploration and development teas well as LNG and important as we move forward that we actually balance the 2. So we are actually making good progress in terms of our overall portfolio you’ve seen today earlier on, we’ve announced the expansion of the power to 2028. At the back of that us flexibility in terms of how we bring LNG on board, yet at the same time, maximizing the ratio and development of quite a few of our projects that we are already working on. In terms of LNG, we are targeting to finalize the term sheet by end of this year. Again, it’s quite important that we reach the right commercial terms before we commit ourselves. We’re discussions and negotiations with our partners. That will enable us to probably take about months or 8 months to complete and finalize the FID so that we can start with the construction. We are also discussing timing with them, particularly given the fact that we’ve got now 2 more years flexibility. So the original time line was 2026, and we would like to create some flexibility as we engage going forward. What is more critical for us is to ensure that the infrastructure in Maputo is actually built more the actual contracting of the molecules. Hopefully, that gives you a good clarity of where we are
Fleetwood Grobler
If I can jump in then just on the impairment or to your question around whether the stronger oil prices in the assumptions could not have led to a reversal impairment. — there’s detailed disclosure on the impairment assumptions in Note 9 of the annual financial statements. And you’re absolutely spot on that we did, of course, increase oil assumptions on the back of what could be short-term tightening of the world market — so in terms of our assessment of the carrying value of our assets, we did have to take into account that this could not this potentially wasn’t a structural change that could be long lived. And it’s also offset then by other assumptions that have had a negative impact on the valuation. And I think to that extent, we’ve highlighted carbon tax and the also now as a measure that could attract value on that carrying value. So on the basis of sensitivities. We’ve assessed that and got to the conclusion that there’s no need at this point to reverse impairments. But of course, we’ll continue to do the assessment on an annual basis.
Hanré Rossouw
Thank you, Andre. Sticking with Chorus Call, I think we had Adrian Hammond next in line. Adrian, please go ahead.
Priscillah Mabelane
Unfortunately, Adrian’s line has dropped. Great. Can we move to Chris Nicholson, please?
The call in person again. I hope you can hear me.
My question is around the European chemical business. I’m sure as many are pretty worried about what’s happening in the European gas markets can. Could you tell me what happens if Germany moves to Stage 3? What would the impact be on your European chemical businesses in Germany and Italy in Germany and the Pacific. And then also maybe just some guidance on where you see margins heading in that business. I mean if we look from the scale of feedstock cost increases that they could be hitting negative. What are your options in that instance?
Priscillah Mabelane
Thank you, Chris. I’m going to ask Brad to weigh in on that. Suffice that we have got a number of different situations from North to South Germany and to Augusta and southern part of Italy and Sicily because the sources of gas is different. One is supported from rate others are dependent on the Russian gas. But notwithstanding, I think we’ve got a very clear understanding of the levers that we need to watch out for. And I’m going to ask Brad to weigh in on that.
Speaker 11
Guys, Happy to do that. Thank you for the question, Chris. As Sehat said, we’ve got a task team working on our response to reduced gas supply as to all of our industry partners in the region. As for Italy, let’s start there first. I think we’re well placed to be able to continue our operations. We have the portfolio of gas supplies. — as well as liquid fuel options to be able to continue those operations. In Marel, our large site in Central Germany is actually fed by our host company, Evonik. They’ve announced publicly that they’re intending to their coal-fired power station and steam generation as well as switch some of their natural gas consumption over to LPG in line with the the government guidance on the gas network. For Brunsbuttel, we do have options as well. We’ve been working on liquid fuel choices. One of the unique things about the Brunsbuttel side is that we also provide heating steam, low-pressure steam to the community of in we’re expecting to be able to continue to receive natural gas to some degree there. I think if you look at some of the latest public information from the German government, they do sit at a higher level of storage than what they normally wouldn’t be that’s obviously a concern whether they continue to build that up for the winter, and we all continue to monitor that. In terms of your questions on margins, certainly, margins are under pressure. If you look at daily gas prices, it does put pressure on some of our operations that are large gas consumers. And so we work with our customers to see what can be done to be able to pass it on. And we’re making choices, as Plywood mentioned earlier, on alternative energy supplies but also looking at alternative sources of feedstocks. — and where necessary, we will moderate rates, and that’s why we gave guidance for fiscal ’23. That was a bit wider than usual, showing a 0% to 5% because if we continue to see the pressure on gas, then we potentially would be making some choices on how much volume we produce.
Thank you, Brad. I’m going to switch back over to the online platform. There are a few number of questions coming through on the operational theme. There are a few questions around Mozambique gas. I’ll cluster those together. The first one comes from Adrian Hammond at SBG. If the plateau is extended to 2028, why is LNG still needed Synfuels volumes were historically 7.6% to 7.8% to settle in the legal return to this level. I think some of that has already been covered by Simon. What is the current vital neck. And then also on gas, there’s another from ethos all addressing the sharply declining gas reserves in Mozambique and what solutions have you looked at? And how much CapEx is expected to be spent? Are these enough to fulfill sole needs while the company transitions to green hydrogen? — if you could address that
Thank you, Tiffany. And I think we have basically addressed the gas play in Mozambique. Presales touched on that. So I can only add to say that we would continue our efforts to look at what are the opportunities in our fields that we operate and within our field. So we had very good success with infill well drilling campaign. So we’re excited about that, and that informed also the extension of the — and so we will do more work and more drilling and in that regard. Moreover, — we are busy with the PSA implementation project. And that will also assist us to think about, is there any excess gas that can be committed beyond the need for the Mozambican in-country power station that would be the first taker of the volume of gas over the period that was committed. But we also know that if we have more gas, we’ve got the opportunity to bring that gas South Africa, and we are busy finalizing all of those agreements with the Mozambican on but they are willing to help us out on that basis. But I think the options of gas is a key focus for the Energy team and Precilla has indicated that they want to create optionality to not only think about our own fuels but also the LNG and other adjacencies that we may be harvesting in our own area. So I think that good summary, I think, of where we are.
Thank you, Fleet. I think the next question comes around the Karnes maximum gas pricing from Habitare Investec the gas prices, any challenges in enforcing the current NASA maximum gas price, that suggests prices could be more than 90% higher
I think the situation was nurse and thank you, Herbert. We have been engaging with nurses since the first quarter of this year to finalize within the framework of the gas pricing mechanism to come through on a price that would be realistic in today’s environment given that the maximum gas price would have been ZAR 270 per gigajoule, but we did not think that is realistic. We have proposed a different price level. We’ve engaged with NSAA — at this point in time, we haven’t finalized that with NSA. We have indicated that we will not implement this price announcement that we mentioned in August. And we would like to result that was us because in the end, that is what they have had to assess the rationality test for a realistic price and that we will then — once we’ve come to that agreement, we will take that forward with our customers. And I can only say our customers in Sasol are both in all earnest waiting for that engagement so that we’ve got certainty of what the rest of the year would hold in within the agreed pricing framework that was agreed already last year was us
Speaker 1
Yes. Thank you for that question. I think, first of all, we have indicated that one of our mitigation levers to have a ratable coal supply is our stockpile level. Now the last year this time, our stockpile level was not in a very healthy level. And when the rainy season started, that exacerbated our ability to maintain software-level I think this year, we’ve got a very different approach. We will maintain our stockpile level well above the 1.5 million tonnes. As a matter of fact, as we go now into the Synfuels shutdown that Simon that will last us to the end of — on the last week of September. We will make a by increasing the coal mining the stockpile so that we bolster that 1.5, maybe to a range of 2 million to 2.5 million tonnes or beyond, so that when we entered into the rainy season that we’ve got more security through stockpile measures and can mitigate that event.
Thanks, Stefan. In terms of investment-grade ratings, unfortunately, at the moment, the rating agencies does tie Sasol’s rating to the sovereign — and unless there’s a significant increase in offshore profits in the region of 50% plus. Unfortunately, there sovereign grade credit rating will always be the ceiling for the company. And we’ve been engaging with the various rating agencies on that. But unfortunately, that’s just how things work at the moment. In terms of group CapEx outlook, in nominal terms, I think you can safely apply a 4%, 5% inflation impact to the 20% to 25% guidance. We are very comfortable that the kind of the next year, as I’ve mentioned, we will be in line with that guidance. And certainly 24, 25 as well. over not only the sustaining of our business, but also the transformation needed the ZAR 15 million to ZAR 25 billion that we’ve got to spend to 2030 to meet our greenhouse gas targets. And the hedging I think in terms of hedging, as I’ve mentioned, the hedging does come down to around 25% for financial year ’24 in terms of oil. — and we’ll continuously reassess that level. I think as I’ve mentioned earlier, it’s a function of operational gearing that we expect in the business, the financial gearing, particularly around our absolute and net debt level. And we will — we do detailed Monte Carlo analysis of sensitivity to the various outcomes. So it relates not only to oil, but also more more particularly on the rand-dollar exchange rate as well as well as ethane and on coal. But in general, given the stronger balance sheet, as I mentioned, we do expect the hedging levels to be more around the lower levels that we’re seeing now
Thank you, Andre. Well, you are on the mic and other 2 questions around debt. One comes from Adrian Hammond again at SBG. Can Sasol sorry, what is the group I’ve already covered that one. The debt profile comes from Sellari at Marks. The debt profile shows a spike of ZAR 2.8 billion in FY ’24. Could you give me your current thoughts on future funding and refinancing strategy? Do you plan new bank loans market as part of the strategy.
Thanks, Tiffany.
So I think in terms of — and this is where I’d love to take credit for the fixing of the balance sheet, but I said I’ll not take credit for anything today. But the balance sheet isn’t very rude health. I think as we’ve mentioned, we’ve got a net debt level at the period end of USD 3.8 billion gross debt level, we had just over USD 6 billion effectively of our debt is U.S. dollars. So in terms of refinancing strategy, the key focus is to shift more of that U.S. dollar debt into rand-denominated debt that will better match our cash cash generation. In terms of refinancing, yes, we’ve got ZAR 2.8 billion in financial year ’24 million. That relates to a term loan and a U.S. denominated bond. And then we also have in November this year, another $1 billion bond that needs to be refinanced. We’re very comfortable that there’s a range of options to refinance that. We’ve got the RCF facility that we can very comfortably use as a bridge. We can use existing cash flows. And then we will look at other instruments as well as alternatives. So not losing sleep likely this plan on the balance sheet.
Thanks for that question.
Thanks, Andre. I’m going to move back to Chorus Call and take 2 questions from Alex Comer and Lake Operator, can you direct the questions, please?
I’ve got a couple of questions. First of all, just on the gas LNG situation. Obviously, the LNG price is very high at the moment. Is there a point in which you decide not to go down that route — and just can into production to make your 30% are you determined to go ahead regardless of the economics. That’s the first question. Secondly, just on Natura, I see on your presentation you talked about just to a green refinery. So as decision open level of CapEx will be required in order to make a new fuel rig? And then but in terms of the dividend, the 2.5 to 2.8x cover. How should we think about the levers to pull that down to the lower cover ratio.
Thank you
Andre, if you could address that as
Let me start with the dividend. As we’ve highlighted, the capital allocation framework incorporates our dividend policy, which relates to 2.5 to 2.8x cover of core EPS. I think important perhaps just to note that Core excludes any funding that excludes any hedging losses or gains. So we make sure that the investors get the full benefit of the of the cash generation of the core business. To that extent, we that will go to a 2.5% to 2.5x cover the net debt levels dropped to below $4 billion in absolute terms, we briefly obviously hit that now briefly at the period end. But we will want to see that sustain throughout a period to lower that cover from the 2.8% to 2.5%. Beyond that, as I’ve mentioned, we will also return excess cash to shareholders through metric aspects such as special dividends or buybacks.
Thank you, Alex. So I’m going to address the Natref question, and I’m going to ask Precilla to weigh in on the LNG options that we look at. So Alex, I believe we have announced — probably a couple of years ago, what is the capital requirement for getting Natref clean fuel compliant, which was — if I recall, I’m not sure it was 4 billion plus at that time, a range. We’ve given a range to the market. Now — we have achieved 2 things in the prefeasibility study and our operational review with our partner Total Energies. First of all, we have come up with a very creative way get nitrite output to clean fuel compliant on diesel for a very low investment. And I think this is I’m not going to mention the amount, but it is within the operational expense rent that you can achieve that. And that we will then be ready for by towards ’23. That means in next year. And on the pet and judged on the teen fuels there, that is solution that we are looking at, and I’m not going to give you the price or the cost range today because it’s a prefeasibility type of quality that we’re busy with. But all I can say that it is substantially substantially lower than the previous clean fuels costs or CapEx that we’ve signaled to the market. And we will come back, hopefully, within the next 6 months to get further clarity on that specific amount.
Thanks, it. Alex, good question. The simple answer is no. We won’t do it at low cost. But having said that with me numbers. We are looking at a portfolio, as I’ve mentioned, we are targeting a blended price of going forward, which needs to break even with — we do recognize that there will be some dilution but we quite critical for us that we to deliver the right returns for our shareholders. So that balance is going to be quite critical. So we are working towards. We’re also mindful for the South African Inc. as well because there are industries that require guests going forward. So we’re hoping that there will be a predictable regulatory framework that ensures that this is appropriate as the affordable price going forward. In terms of our term sheet negotiations and note that we are mindful of the current volatility in the market, but we are targeting a long-term contract that will actually go beyond the current cycle, hopefully. So with that, we don’t expect that the volatility will impact us significantly. Having said that, a key for us is for the infrastructure to be built, then we can find alternative LNG sources that are competitive into the future.
Thank you, Prasila. Sashank, if you could go ahead with your questions, please.
The opportunity our question. So I think on my first question, this was partially asked so just following up on the response, Peder mentioned that petrol and fuel you’re looking at a much lower cost clean fuel compliance. I’m just wondering what changed versus the earlier TRx guidance or the number that was out there in the market and why you think it’s going to be much lower now? And the second question is just hedging for Elaine. I know that in FY ’21, you did hedge, almost 30 million barrels. Obviously, retail prices now are close to $0.66 a gallon, which I’m sure is impacting your margins in the U.S. business. So just one thing in an end look at the hedging policy for FY ’23. It doesn’t seem like you’ve had detained at least in the coming quarters. So just wondering what’s driving that strategy.
Thank you, Sashank. I will deal with the clean fuel CapEx. I think we’ve mentioned it earlier. So the one item was the creative way of taking the capital out really for the diesel clean fuels compliance. So that made a big difference. And then, of course, when you bring in your bio feedstock component, although on a hybrid basis, so there would be a mix. It does also help to get capital down for the full clean fuel solution on a petrol base and crude base only. I think those were the drivers that we are seeing that help us towards a lower CapEx number. But as I said, we’ve done the previous study, we haven’t got more details now to develop, but let’s do that work, and then we’ll signal much more detail.
On the ethane hedging, we did do the last year ZAR 4 million. And in terms of this year, the focus is really to to get operational stability. I think we’ve got flexibility in our U.S. business, we can get merchant ethylene as well. Remember, we, of course, take ethane produce ethylene. So we look at the current pricing levels, given that there was a significant spike in the ethane price — we didn’t see it right to actually lock in the higher price. So we didn’t go into the market for ’23, ’24, we will again assess the pricing in the forward curve does lock in a reasonable return for us on that business, we will again venture into the market. But I’ve got to stress that the — certainly on the ethane and the coal side, the hedging is not that material in the bigger context of the the oil and the other hedges that we do.
Thank you, Andre, and thanks for those questions, Shanade. If we can move back over to the online platform, there’s 2 questions around our strategy. The first one comes from Peter Cambridge at emerging market. Can you spell out how clean projects keen energy projects will be funded. And the second question comes from Tao Matute at NPV Investments on the integrated environmental road map at Secunda operations is April 2025, the targeted compliance date. And if so, if the risk of implementation of the initiatives if some of them extends beyond April 2025. if I could
Yes. Thank you, Peter, and thank you, Tao, for those questions. So first of all, the capital allocation framework that Henry explained this morning, is clearly going to guide us also on those low or clean energy projects or low corn as we transform. And I think we will see we also have indicated clearly that we will have certain parameters that we have learning from the mega project we implemented in 2014 to 2019 in the U.S. And we have indicated that we will not invest in any large project, more than 10% of our market cap and some other moderating considerations, and we will still apply that. But that’s within the of the capital allocation framework. And I think as we move into these nascent markets of clean energy in the likes of green hydrogen. One of the underpinning anchors in such a venture would be to secure an offtake. We will not invest in like green hydrogen production, if we don’t have certainty around offtake and what it means and how we draw the capital that you would be implementing it with. So I think — that’s the way we think about it at this point in time. And when we cross — and when we get the will focus our disciplined capital allocation framework within the opportunity and need at that stage. When we look at the integrated environmental road map unoperationWe have signaled all along that the SO2 solution is more complex in terms of the implementation. So I think that risk remains. Nothing has changed there. We have it combined a combined application within the regulatory framework to look at the SO2 load-based compliance versus the concentration based compliance. And that is now in the hands of the regulator. We hope to get clarity on that in the next year or so, but that would also be one of the parks that inform such a risk not. But I do think we are very cognizant and we’ve been very open and honest in terms of that at risk for that date, and we’re working with the regulator to get clarity on what is the technical solution we will apply, but that’s the situation at the moment.
Thank you, let — there’s a question from Wade Napier around the specific segments within the Eurasia segment and underpinning the expectation of 0% to 5% demand growth. Peter, would you like to address that first?
Yes, I’m going to ask Brad to win. I guess it’s in the essential chemicals segment, but let me hear what Brad is
Yes. I think, Wade, thank you for the question. I think we were guiding for the growth of sales volumes versus prior year. So we do expect to see 5% higher sales volumes in ’23 versus ’22 do see a number of our market sectors continuing to recover. Some of those were actually quite depressed during fiscal ’22. So automotive is one. We continue to see a growth in demand for emission control catalysts and also in process catalysts. So we do see that stepping up. And as Leon mentioned, the essential care chemicals, we really see that growth happening at GDP levels pretty much regardless of recessions and pandemics and I think we saw that back in 2020 and 2021. So we do expect to be able to recover those volumes. I think, as I mentioned earlier, the big question is what happens with the economics. And we continue to be — to work to pass on the cost to our customers but also taking into account what can the consumer afford. And so that’s going to be a key factor for our outlook for this year as to whether we’ll be able to continue to run operating rates at some of those units to be able to generate positive margins we’ll monitor that very closely because we don’t want to build up inventories and find the demand fall away.
Thank you, Brad. Before we close, there’s a last Chorus call question from Adrian. Operator, could you please connect Adrian.
Just to come back to Haley’s discussion on the and shifting into South African debt. Is it a situation where the dais can’t be funded in dollar earnings? And how easy this is to show service to South African is in terms of the Altice or you just simply one existing at matures. I just think about what the implication is on converting. And then to come back on the situation with gas and coal, the outlook for South Africa. — it is stated that you intend reducing core production by some 9 million tonnes. Could you break down between where it comes from. And to reconciliate with core registers I know that purchase call from you could never mind and that has life expectancy up until 2020. So what are your plans around that?
Thanks, Adrian. In terms of dollar debt and debt conversion. As I’ve noted, we’ve got ZAR 6 billion of of gross U.S. debt. And it relates back also to the maturity profile and the other question that we’ve got the ability as these maturities are quite easy to manage either to just settle — and if you ran that in the future, we’ve got a DMTN or we could buy back to debt. I think the great thing about a balance sheet that’s strong is that you’ve got flexibility in various options. So cash flow generation then can be used to just settle those debt or we can also use, we’ve got $2.8 billion in RCF facility that we can use as an interim measure to also balance the effective refinancing of dollar debt with rand debt. But ultimately, we are targeting, as I’ve mentioned, lower debt in absolute terms as well. I think in terms of a coal usage outlook in
Yes. Thank you, Adrian. So we have indicated that from 2030 onwards. As I’ve indicated earlier this morning, we are also looking at a phase turndown of our boilers. Now that is not only helping us to attain also our reduction or emission target reductions because about of the CO2 is developed or generated in a utility block and about is generated in our process block from gasification to Fisher drops in the refinery and chemical side of the process. So what we are looking at, and this is why we’re so excited is that the fine coal solution will enable us to use valuable feedstock that is going through fine cold. And remember, for ton of coal, we mine, there’s about 30% fine coal and about 60%, 70% that goes into gasification. So if we can use that fine goal, it is a source of feedstock and we need to mine less coal to achieve that. So — that is the part that we are looking now, and that’s some of the work we’ve done in the past 12 months. And that gives us also optionality. But I think the total combination of pathways of fine coal usage utilization of gas, the introduction of hydrogen into the gas loop to work away more CO2 that’s inherent into the gas circuit, turn that into products. Those are all the opportunities that we look — but I think we well covered that in to achieve that reduction from 2030 onwards. As far as IsoBonellago, I’m going to ask Ryan to weigh in, in terms of our focus with Isabella, I think you’re quite right. We know that, that contract comes to it, but we’re looking at further options on
Yes. Thank you very much for the question.
Is one or Tugela has been a very loyal
To Sasol over many years. And the contract is coming to an end. We are talking to other colleagues on some options, they do have further reserves in the area and also know that we also own reserves, the so-called Alexander block that we’re also having a look at block can be mined, not necessarily by ourselves, but also either by means of open cast of stop mining for underground. We are looking at that, and we’ll have answers soon. And then also, we need to mind that there is some other owners of reserves around that area for Sasol. So we believe that we will be covered.
Qaend
Thank you.
Thank you, Ryan. With that, we’re going to wrap up the session today. Hundred for your time and the rest of the Sasol management executive team. If you have any further questions, please direct it to the Investor Relations office, we will happily respond — thank you again for your participation today. We wish you a pleasant and safe day further.
Thank you. Thank you.+
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