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SASOL 2016 (ended 30, June 2016)

Headline earnings per share decreased by 17% (R 41.40), despite an average 25% decline in Rand oil prices

For over 65 years, Sasol has been a pioneer in the inventive monetization of hydrocarbons. Using coal, crude oil and natural gas, along with the skills of people and the advantages of technology, Sasol has become one of the world’s largest producers of synthetic fuels and a global chemicals player.
Sasol is an international integrated chemicals and energy company that leverages the expertise of 30,100 people working in 33 countries. It develops and commercializes technologies, and builds and operates facilities on a global scale to produce a range of high-value product streams, including liquid fuels, chemicals and low-carbon electricity.

According to the Annual Integrated Report 2016 the financial performance of the Sasol group, as a global player, has invariably been impacted by the movements in international markets and the on-going effects of depressed prices of gas, crude oil and related chemicals products This meant that the 2016 turnover decreased by 7% compared to 2015, dropping from R 185,266 million (2015) to R 172,942 million (2016).

The operating profit of R 24.2 billion decreased by almost 50% compared to 2015 (R 45.6 billion and a  2% increase of R 731 million in 2015) on the back of a challenging and highly volatile global market. Average dated Brent was US$ 43/bbl for the year ended 30 June 2016 compared with US$ 73/bbl in the previous year.

Earnings attributable to shareholders for the year ended 30 June 2016 decreased by 55% to R 13.2 billion from R 29.7 billion in the previous year. Headline earnings per share (HEPS) decreased by 17% to R 41.40 and earnings per share (EPS) decreased by 56% to R 21.66.

As a consequence of the particular fall in the crude oil price from over US$ 100 a barrel in 2014, to a low of US$ 27 in January 2016 and US$ 48 by June 2016, the industry has adopted a prudent outlook by significantly stripping assets. In 2016 Sasol sold assets to the value of R 12.3 billion. The most significant re-aligned items include the selling of Sasol´s Canadian shale gas assets for R 9,882 million (CAD 880 million) and the low density polyethylene cash-generating unit  for R 956 million (US$ 65 million). As a result of the R 9.9 billion partial disposal of the Canadian shale gas assets, which was partially offset by the recognitions of a previously unrecognized deferred tax assets on the Production Sharing Agreement in Mozambique of R 945 million, the effective corporate tax rate increased from 31.7% to 36.6%.

In the internal operating context, the greatest challenge facing Sasol is the efficient and effective execution of the Lake Charles Chemicals Project (LCCP) in the US. This is an important component of the company’s value as it is optimizing and growing the business’ material matter. When complete, this project, which consists of a 1.5 million ton per year ethane cracker and six downstream chemical units  will represent more than half of Sasol’s market capitalization.

Notwithstanding a tough macro-economic environment, Sasol maintained a strong operational performance across its global integrated value chain over the year. The Energy business liquid fuels production increased by 1% compared to 2015 due to record production volumes by Secunda Synfuels Operations and continued stable operations at the Natref Operations.

The composition of turnover and profit from operations by segment is set out below:

The operating profit of the Operating Business Units Mining increased by 9% to R 4,739 million mainly as a result of meaningful contributions from the BPEP and RP levers. Normalized unit costs of production were contained to 5% below inflation for the second consecutive year. Sasol´s Syferfontein colliery produced a South African record of 11 million tons by an underground mine in 2016. Export coal volumes decreased by 6% to 3.2 million tons and continued to benefit from the weaker Rand/US dollar exchange rate.

Exploration and Production International (E&PI) recorded an operating loss of R 11,714 million compared to an operating loss of R 3,170 million in 2015. The Mozambique operations in 2016 recorded a profit of R 1,128 million compared to a profit R 1,847 million in 2015. The decrease was mainly due to translation losses of R 673 million. Production volumes increased by 5% as a result of the efforts to clear a bottleneck in the production facility in Mozambique.

The Canadian shale gas asset in Montney generated an operating loss of R 10,957 million, including a partial trading in of R 9,882 million. Excluding the effect of this sale, the loss decreased to R 1,075 million in 2016 compared to R 1,153 million in 2015.

The Canadian gas production volumes were 5% lower compared to 2015 due to reduced development activities, driven by lower oil and gas prices. In order to manage the shale gas asset through the low gas price environment, Sasol concluded an agreement with its partner, Progress Energy, to settle the outstanding funding commitment of R 4,160 million (CAD 380 million) and reduce the pace of appraisal, development and drilling activities. An 18-month reduced work program was approved in June 2016.

The operating profit of the Strategic Business Units Energy of R 14,069 million decreased by R 8,457 million or 38% compared to 2015, compared to a 41% reduction in crude oil prices. Operating margins held firm at 22%, mainly as a result of record production volumes, higher liquid fuels sales through higher yielding marketing channels, the weaker Rand/US dollar exchange rate and contributions from the BPEP and RP initiatives.

The total production of liquid fuels increased by 1%. Sales volumes, however, remained flat driven by lower demand for liquid fuels in Southern Africa, specifically in the agricultural, mining and manufacturing sectors. Gas sales volumes were 1% higher compared to 2015, mainly due to higher methane-rich gas sales to commercial customers. The Sasol´s share of the Central Térmica de Ressano Garcia (CTRG) joint operation in Mozambique delivered 653 gigawatt-hours of electricity.

Performance Chemicals continued to deliver a solid performance. Operating profit of R 11,276 million decreased by 11% compared to 2015 as a result of the R 2,021 million impairment reversal on the FT wax expansion project (FTWEP) in 2015. Normalizing for this impact, operating profit increased by 5%.

The decrease in wax and ammonia sales volumes was compensated for by an increase of 4% in organic sales volumes. Normalized sales volumes were up by 1.8%. Normalized cash fixed costs decreased by 5.2% in nominal terms, as a result of BPEP and RP investment initiatives.

Patenting activity of the company is evaluated for 2015 and remains virtually at the same level as one year earlier. Our estimates show that in the field of synthetic fuel production the share of Sasol patent documents published in 2015 comprised approximately 3% of the total number of documents found in the largest patent offices of the world. The total share of patent applications published by the company is the same – roughly 3% of the total number of applications. This value remained virtually unchanged compared to the previous year. On average, patent applications comprise 66% of all patent documents of the company for this year, while the other 34% are patents granted in different countries. Patent documents of the company in the field of synthetic fuel production almost entirely relate to Fischer-Tropsch technologies with only few additional documents in methanol and integrated gasification combined cycle fields.