Johannesburg - Standard & Poor's Ratings Services said on Thursday that it has revised its foreign currency outlook to negative from stable on South African oil and chemical group Sasol Ltd, following the outlook revision to negative on the Republic of South Africa (foreign currency BBB+/Negative/A-2, local currency A+/Negative/A-1).
At the same time, Standard & Poor's affirmed its 'BBB+/A-2' foreign currency long- and short-term corporate credit ratings on Sasol.
The outlook revision on the sovereign, which was made yesterday,
reflected a deteriorated macroeconomic environment, risk of fiscal deficits, and further strong depreciation in the South African rand (ZAR). With the bulk of Sasol's operating profit (80% in financial year 2008, ended June 30, 2008) generated from operations in South Africa, Sasol's ratings are influenced by those of the sovereign.
"Increased country risk factors for Sasol include heightened risks of inflation, lower local demand for oil and chemical products, and the potential for higher taxes should fiscal pressure increase for the government of South Africa," said Standard & Poor's credit analyst Karl Nietvelt.
By contrast, the recent depreciation of the rand against the US
dollar (the exchange rate fell to about 10x from 7.8x at end-June 2008) should have a positive impact on Sasol's profitability. This is because Sasol's domestic oil product sales as well as its chemical exports are indexed to international dollar based prices, while Sasol's cost base
is largely in rand.
The negative outlook on Sasol mirrors that on the Republic of South Africa. A loosening of macroeconomic policies would put downward pressure on the sovereign ratings, and thus also on Sasol's ratings, which are unlikely
to exceed those on the sovereign.
Prudent action taken
Sasol's own operating and financial performance outlook remains strong, however, helped by the steep fall of the rand and resulting strong profit generation at Sasol synfuels and export-driven chemicals, which should largely offset weaker oil prices and less favourable macroeconomic conditions.
Other mitigating factors include Sasol's $90/barrel crude oil floor price in place in financial 2009, which applies to roughly one-third of synfuel and upstream production, as well as increased contributions from new projects, such as Oryx, Arya, and Turbo.
Our analytical focus will be on how Sasol will manage its ambitious investment plan, generous dividends, and ongoing share buyback activity on the one hand, with prudent balance sheet
management on the other.
Management recently took prudent action to maintain gearing (defined as net debt to equity) at below its previous 30%-50% target (20% at end-June 2008). In light of Sasol's significant dividend increase, we may raise our current adjusted funds from operations (FFO) to debt requirements of above 50% (110% at end-June 2008) once we have met with management in the coming
months.
Although Sasol's financial profile incorporates a fair degree of
flexibility, rating downside could stem from a downgrade of the sovereign or further increases in South African country risks (such as inflation or power issues, or company-specific windfall taxes). Future part debt-funded multibillion dollar CTL projects could be negative, if accompanied by gearing policies that are less prudent than currently expected.
- I-Net Bridge