Standard & Poor's Ratings Services said on Friday that it revised its outlook on South Africa's largest oil and chemicals company Sasol Ltd. (SOL) to negative from stable.
“At the same time, we affirmed our 'BBB+/A-2' foreign currency long- and short-term corporate credit ratings on Sasol,” it said.
“The outlook revision on Sasol reflects that on the Republic of South Africa (foreign currency BBB+/Negative/A-2; local currency A/Negative/A-1) on March 28, 2012. (See “South Africa Outlook Revised to Negative On Persistent Economic And Social Problems; All Ratings Affirmed”.) The ratings on Sasol are influenced by those on the sovereign because Sasol generates about two-thirds of its operating profits from South Africa.
“The affirmation reflects Sasol's strong results in the half year to Dec. 31, 2011, showing the benefits of high oil prices and cost containment. We anticipate that these factors are likely to persist if the South African rand does not materially strengthen against the U.S. dollar. Sasol's performance and robust balance sheet mitigate the announced interim dividend increase and material investment plans.
“The ratings on Sasol reflect our view of the group's diversified and highly profitable domestic activities along the energy chain, particularly its South African coal-to-liquids (CTL) synthetic fuel plant and its Oryx gas-to-liquids (GTL) plant. 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 the high sensitivity of Sasol's earnings to lower oil prices and/or a strong South African rand. Further constraints on the ratings are country-related risk factors, alongside a potential rise in debt and project execution risks if and when several multibillion-dollar CTL and GTL projects are built in the next 3-7 years,” the rating agency said..
“Under our prudent crude oil price assumptions, we assume oil prices declining to $80 per bbl from $100 per barrel (bbl) over calendar 2012-2014 and a rand to U.S. dollar exchange rate of South African rand (ZAR) 7.5 to $1. Accordingly, we estimate that funds from operations (FFO) could be about ZAR35 billion for the financial year 2012 (ending June 30). 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 2012 and 2013. This is in spite of large capital expenditures of about ZAR30 billion annually,” S&P concluded. - I-Net Bridge