(The following statement was released by the rating agency)
Overview
-- On Oct. 12, 2012, we lowered our foreign currency long-term credit
rating on the Republic of South Africa to 'BBB' from 'BBB+' to reflect the
deterioration in the social and economic environment. The outlook remains
negative.
-- The ratings on South Africa's largest oil and chemicals company Sasol
Ltd. are influenced by those on the sovereign and South African country risk
because Sasol generates about two-thirds of its operating profits in South
Africa.
-- We are therefore lowering our foreign currency long-term corporate
credit rating on Sasol to 'BBB' from 'BBB+' and affirming our short-term
rating at 'A-2'.
-- The negative outlook on Sasol largely reflects that on South Africa,
and the likelihood of us lowering the ratings on Sasol if we lower those on
South Africa further.
Rating Action
On Oct. 16, 2012, Standard Poor's Ratings Services lowered to 'BBB' from
'BBB+' its foreign currency long-term corporate credit rating on South
Africa's largest oil and chemicals company Sasol Ltd. At the same time, we
affirmed our 'A-2' foreign currency short-term corporate credit rating on
Sasol. The outlook is negative.
Rationale
The downgrade reflects that of the Republic of South Africa (foreign currency
BBB/Negative/A-2; local currency A-/Negative/A-2) on Oct. 12, 2012, as well
our perception of increased country risk for companies operating in South
Africa. (See "South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings
Lowered To 'A-/A-2'; Outlook Remains Negative," published on RatingsDirect on
the Global Credit Portal.) The ratings on Sasol are influenced by those on the
sovereign and by South African country risk because Sasol generates about
two-thirds of its operating profits in South Africa.
Country risk factors for Sasol in South Africa include currency volatility,
persistent input cost inflation, limited access to suitable labor, the
potential for windfall taxation, and a degree of political uncertainty. These
are in addition to recent challenges that all mining companies operating in
South Africa face following strikes by miners. We note, however, that Sasol's
underlying performance for the financial year to June 30, 2012 was strong and
that its operations have not yet been affected by the recent strikes.
We see a rebound of the South African rand's strength against the U.S. dollar
as a material risk for Sasol (the average exchange rate in the year to June
30, 2012, was slightly weaker than in recent years at South African rand
7.78 to $1). This is because Sasol's domestic product sales, as well as its
chemical exports, are indexed to U.S. dollar-based international prices, while
Sasol's cost base is largely in rand.
Sasol's sound operating performance and reported net cash balance sheet
mitigate the company's announced dividend increases and material investment
plans, in our opinion. On June 30, 2012, Sasol's gross financial debt totaled
ZAR16.1 billion, and was covered by the company's total cash balance of
ZAR18.7 billion. The 35% dividend increase is in line with earnings growth
year on year, but outstrips growth in operating cash flow. Strong operating
cash flow boosted free operating cash flow before dividends in the year to
June 30, 2012, although investment continued to increase.
The ratings on Sasol reflect our view of the company's "satisfactory" business
risk profile, thanks to its diversified and highly profitable domestic
activities along the energy chain, particularly its South African
coal-to-liquids synthetic fuel plant and its Oryx gas-to-liquids (GTL) plant
in Qatar. The ratings also reflect our assessment of Sasol's "strong"
financial risk profile and what we consider to be its prudent financial
policies.
These strengths are tempered by Sasol's earnings' high sensitivity to lower
oil prices and/or a strong South African rand, alongside a potential rise in
debt and project execution risks if and when several multibillion-dollar GTL
projects are built.
Under our prudent crude oil price assumptions, we see oil prices declining to
$80 per barrel (bbl) from $100 per bbl over calendar 2012-2014, and a rand to
U.S. dollar exchange rate of ZAR7.5 to $1. Accordingly, we currently estimate
that funds from operations (FFO) could be about ZAR34 billion for the
financial year 2013 (ending June 30, 2013). However, we believe that Sasol's
financial metrics should remain robust in the medium term, reflected in our
forecast of Standard Poor's-adjusted FFO to debt of more than 75% in 2013.
This is in spite of large capital expenditures (capex) of ZAR25 billion or
more annually. The actual amount of capex could be higher depending on the
progress of new GTL projects and potential upstream, gas-focused acquisitions.
An adjusted ratio of FFO to debt of more than 50% (it was about 200% at the
end of June 2012) is consistent with the current ratings under our prudent
crude oil price assumption of $80 per bbl from 2014 for Brent and an exchange
rate of ZAR7.5 to $1. We estimate that FFO to debt of 50% is consistent with
the lower end of Sasol's target range of balance sheet debt to equity of
20%-40% (which was 2.7% on June 30, 2012).
Liquidity
The short-term rating is 'A-2'. We assess Sasol's liquidity as "adequate"
under our criteria, with sources covering uses by more than 1.2x in the next
12 months. This is based on Sasol's comfortable reported cash balance of
ZAR12.7 billion on June 30, 2012, excluding restricted cash of ZAR5.3 billion
(largely at joint ventures). Together with our estimate of FFO of about ZAR34
billion, this should comfortably cover Sasol's modest short-term debt of
ZAR3.3 billion and working capital needs.
We anticipate modestly negative discretionary cash flow in financial year
2013. We reached this projection after deducting from FFO the group's estimate
of capex of about ZAR24.8 billion and dividends of about ZAR11.0 billion
(assuming the declared final and interim dividends are at a similar level to
financial 2012). We note that if Sasol continues to increase both investment
and dividends ahead of growth in operating cash flow, it is likely to have to
raise additional debt.
As a major South African company, Sasol should maintain sound access to local
commercial paper markets and bank facilities, in our opinion. We note that
Sasol has a $200 million revolving bilateral credit facility that matures in
May 2015, committed 365-day bank lines, and substantial short-term uncommitted
bank credit lines.
Outlook
The negative outlook largely reflects that on the Republic of South Africa,
and the potential that we could downgrade Sasol if we downgrade South Africa
further. We presently consider it unlikely that our ratings on Sasol would
exceed those on the sovereign, as Sasol generates about two-thirds of its
profits domestically.
We could also consider taking a negative rating action if we anticipated that
Sasol's credit metrics would weaken markedly, possibly as a result of future
material increases in debt. Such increases could stem from potential large,
debt-funded, multibillion-dollar GTL projects, relative to Sasol's future cash
flow strength, visibility of which is complicated by the rand's volatility. We
will monitor the actual construction and completion risks associated with any
such large projects, as well as related funding arrangements. Other risks that
could lead to a downgrade include further increases in perceived country risks
or a material strengthening of the rand.
We could revise the outlook to stable if we revise that on South Africa to
stable. Such a revision would also depend on Sasol maintaining a robust
balance sheet, with prevailing oil prices supporting its operating profits (as
we anticipate they will).
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
-- Revised Methodology For Oil And Natural Gas Price Assumptions, Nov.
16, 2011
-- Key Credit Factors: Business And Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List
Downgraded; Rating Affirmed
To From
Sasol Ltd.
Corporate Credit Rating
Foreign Currency BBB/Negative/A-2 BBB+/Negative/A-2
(Caryn Trokie, New York Ratings Unit)
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