- Monopoly gas supplier: Sasol is the main supplier of natural gas in the South African market and sells natural gas produced at the Mozambican gas fields, as well as methane rich gas produced at the Synfuels facility to customers in South Africa and Mozambique.
- New gas price methodology: The South African Energy regulator recently published a new gas price methodology following a Constitutional Court ruling in 2019 that the previous price methodology was irrational. We infer that the constitutional court ruling suggests that gas prices should be lower. A new methodology should have a negative impact on Sasol’s future revenues and create a liability if applied retrospectively to March 2014, as determined by the court.
- Sharing the benefits: The new methodology sets a maximum gas price and attempts to share the economic benefits of gas between suppliers and consumers.
- International prices a new basis: The new methodology uses international prices in the US, Europe and the UK as a basis for local prices. Lower prices in European in particular has seen the maximum gas price decline significantly in FY20. The new maximum price declined below Sasol’s costs as a result. The mechanism to adjust for these low prices is not clear in the new methodology.
- Still not the end: Sasol believes the new methodology is a guideline only and that its specific circumstances should be considered. It will apply for new maximum gas prices during this calendar year.
- Impact on Sasol: A possible worst-case scenario could see a negative impact on EBITDA of more than R2bn per annum in future and a liability of almost R6bn if applied retrospectively. Sasol has not raised a provision as it remains uncertain as to the quantum of this liability.
- Share price: Sasol’s balance sheet and cash flows remain vulnerable and the new gas price methodology creates additional uncertainty and risk. We remain at a neutral rating and our target price is R160/share.
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