Good morning and good afternoon, ladies and gentlemen, and welcome to the Sasol annual financial results conference call. Today's call will be hosted by David Constable, President and Chief Executive Officer, and Bongani Nqwababa, Chief Financial Officer.
Following the formal presentation by Sasol management, and interactive Q&A session will take place. A copy of today's slide presentation is available at www.sasol.com. I would now like to hand the conference over to Mr. David Constable. Please go ahead, sir..
Thank you, operator, and good day, everyone. Thanks for joining us for Sasol's year-end results conference call. Joining me on this call from Sasol, as you heard, is our CFO, Bongani Nqwababa.
We also have with us other members of our Group Executive Committee in both Johannesburg and Houston who will support us in responding to any questions you may have.
As you would have seen after yesterday's media presentation, we announced another resilient Group-wide performance, notwithstanding the steep decline in crude oil prices for the period under review.
Our 2015 financial results are a testament to the ongoing commitment of our people and the decisions we took to strategically reposition Sasol for the future and the agility with which we responded to a fundamentally different energy landscape.
Turning to slide 4 and the key messages you'll hear today, I'll begin by reminding you of how the decisions we have taken as a management team are providing Sasol with a solid platform during these challenging times in our industry.
Next, we'll provide you with an update on two of our most important initiatives, our business performance enhancement program, which continues to deliver a meaningful Company-wide contribution and our response plan, which was launched to respond to the lower for longer oil price reality.
We'll then go into more detail on our strong operational and financial performance in FY 2015, with Bongani providing a complete overview of our full-year results.
And before wrapping up, I'll take you through certain refinements to our strategic agenda, including the advancements we've been making on our dual regional strategy and the momentum we are maintaining on selective growth projects in southern Africa and the US.
And to conclude the call, we'll recap how Sasol is protecting shareholder value by proactively prioritizing our business activities.
Turning to slide 5, as you know, given the cyclical nature of the global energy industry, we build commodity price swings into our short and long-term assumptions and scenario plans, and while we could not have predicted the exact moment the oil price would drop nor the quantum, we understood that at some point it would.
As you can see from the graph, up until 2014, the Brent oil price was stable between $95 and $125 per barrel and the Sasol share price gained traction, reaching a R500 to R600 range. Certainly up until September of last year, Group-wide, we were sitting in a reasonably comfortable position.
However, at the time, we reiterated that we could not allow our achievements to lull us into a false sense of security.
To ensure our organizational security and resilience during both the good and bad times, back in November 2011, and as highlighted by the first callout box on the slide, we launched an internal change program driven by the Group Executive Committee.
In terms of this top-down program, we refined our corporate strategy and priorities, streamlined our management structures and adapted our values and culture.
And having done significant groundwork internally, in November 2012, we commissioned an independent diagnostic study to better understand and respond to the root causes of mounting cross creep, primarily here in South Africa.
And we were determined to arrest a concerning trend, where Group cash fixed costs from 2007 to 2012 were increasing at a compound rate of 11% annually.
Looking at the second callout box in the graph, we then formally launched our business performance enhancement program in 2013, which focused on simplicity, efficiency and cost optimization across the Group.
Our diagnostics revealed that our cost and complexity challenges primarily related to how we organized ourselves along a siloed, somewhat bureaucratic, product-based operating model. Although our Sasol operating platform had evolved over decades, it had never undergone a clean-slate design review and thus never really changed.
A crucial milestone of our business performance enhancement program was the implementation of our completely revamped operating model on July 1, 2014. That's the third callout box on the slide.
In restructuring, right-sizing and repositioning the Company, not only were we reducing our cost base and simplifying our systems and processes, we significantly improved our ability to proactively respond to an ever-changing environment.
At the time, of course, as we all know, Sasol was in a great position, having closed off FY 2014 with another set of outstanding results. And as you see here, our share price was at all-time highs. So as you've heard before, we were definitely fixing the roof while the sun was shining.
However, with a sudden change in market forces, the energy landscape was shaken up, coupled with strong oil production from the US and Russia, the determining factor in November 2012 was OPEC's decision to protect market share by maintaining and actually surpassing their output quota levels.
Given the significance of the OPEC decision on the global energy sector and only days later, in early December, the Sasol management team started formulating a comprehensive plan to conserve cash in response to the anticipated lower for longer oil price environment.
As you may recall, our response plan caters for a cash conservation target range of R30 billion to R50 billion over a 30-month period, from January 2015 to end June 2017. And despite lower international oil prices and thinks largely to these decisive actions, our share price is weathering this extremely volatile period reasonably well.
Now, the slide 6, and looking at the management interventions in greater detail and our key achievements in FY 2015, under the business performance enhancement program, our new operating model has been in place for 15 months now, and it is definitely delivering results.
We have completed the Company-wide organizational redesign with the last of the streamlined structure changes and simplified reporting lines to be implemented by October 2015. Nearly 2,500 voluntary separations and early retirements were approved, with overall headcount reducing from 33,400 to 30,919. That's a net reduction of 7.4%.
And again, this is net. This is net of adding 300 employees to our headcount to support our ongoing growth initiatives. In addition, and importantly, on a monthly basis in FY 2015, we've reduced the number of service providers by approximately 10,400 globally when compared with our FY 2014 contractor allocations.
Let me just spend a minute on this and give you a little more color and context around the service provider numbers. The best place I know to look at for man hours and headcounts, both for Sasol employees, hired labor employees and service providers, is looking at our safety numbers, which gives us our exposure hours worked around the world.
So it tells us exactly how many folks are coming through our gates every day.
And so I'd looked at the safety hours from FY 2013 at the start of Phoenix through the end of this financial year, FY 2015, and it's -- we talk about the operating model continuing to deliver results, and certainly, it has on the service provider front and our external [mandatory] supply chain.
The man hours, exposure man hours, for service providers in FY 2013 was 133.4 million man hours. And in the end of FY 2015, the exposure hours for the financial year 2015 were down to 96.2 million man hours. So we've had a reduction over the Phoenix period of 16,045 service providers, less people coming through the gates, basically.
And by the way, Sasol employee hours, including hired labor personnel, moved from 95.8 million hours in FY 2013 to 82.1 million hours over that same period, so a reduction of 5,905 employees coming out of the system.
Now, to ensure that our systems align with our simplified structures, in July this year, we implemented an improved enterprise resource planning system for SA Chemical's supply chain and payroll, plus global talent management and health and safety.
This SAP system was completely integrated into the Company with no business continuity interruptions and was backstopped by robust contingency plans. Over the period, the implementation cost of our business performance enhancement program amounted to R1.9 billion. That's R200 million lower than planned.
Even more notable this past financial year, we achieved sustainable savings of R2.5 billion, R1 billion ahead of our planned savings. Importantly, we continue to target annual cost savings of R4 billion by the end of this financial year, with an exit run rate of at least 4.3 billion.
True to our response plan on slide 7, as mentioned previously, this initiative caters for a cash conservation target range of R30 billion to R50 billion over a 30-month period and builds on the rigorous work conducted as part of the business performance enhancement program. As you all know, several core levers underpin our response plan.
These levers are additional cash cost savings, margin and working capital improvements, capital structuring and capital portfolio optimization. Impressively, from January to June of this year, these areas delivered a cash conservation benefit of R8.9 billion.
These benefits are being realized through further organizational structural refinements in certain functional areas and within our upstream business. We also implemented a salary freeze at top, senior and middle-management levels throughout the organization.
In addition, we are banking cost savings from reduced study and exploration costs, trimmed-down consulting fees and the freezing of at least 1,000 noncritical vacancies at senior and middle-management levels. Separately, the response plan team has made significant progress in reducing our inventory levels.
Moving on, in January 2015, we announced that we were right-sizing our capital portfolio given the tough external environment. As a result of this exercise, we decided to delay the final investment decision on our gas-to-liquids facility in the US, conserving over $600 million in front-end design spend.
And as previously communicated in February, the Sasol Limited board confirmed a change in our dividend policy, which is now based on a headline earnings cover range.
As you can see from the list on the slide, we have consciously introduced flexible levers into our response plan so that we can response to the [broad] macroeconomic environment while ensuring our ultimate profitability over the long term.
The cash conservation levers we have formulated are over and above the business performance enhancement program savings targets, and while our response plan protects cash over a relatively short period of 2.5 years, several initiatives we are actioning will also result in longer-term cost savings.
Here, based on our current analysis, we are looking at an additional R1 billion in annual sustainable savings from FY 2018. Turning to slide 8 and our operational performance, our Group safety recordable case rate, excluding illnesses, improved to 0.32, down appreciably from 0.36 at the end of the last financial year.
And anchored by solid contributions across the value chain, liquid fuel sales in our energy business in southern Africa were up 5%. Performance chemicals and normalized base chemical sales volumes were up 2%.
And through determined management action, our normalized cash fixed costs have continued to trend below inflation and remain flat in nominal terms. Given increased sales volumes, resilient margins and cost increases contained to below inflation, profit from operations by 2% to R46.5 billion.
Now, although headline earnings were down 17% to R49.76 per share, this is we believe a commendable performance in a year when oil prices dropped by 33%.
Finally, taking into account the overall volatile macroeconomic environment, capital investment plans, our cash conservation drive and the current strength of our financial position, the Company has declared a final dividend of R11.50 per share, which accounts to a total dividend of R18.50 for FY 2015.
Now, let me hand over to Bongani, who is going to unpack our results in much more detail.
Bongani?.
Thank you, David, and good day, ladies and gentlemen. It is my pleasure to present our 2015 year-end result to you today, which have exceeded analyst consensus and are well within the earnings range provided in our recent trading statement.
We have delivered another strong operational and cost performance, despite a highly volatile and uncertain macroeconomic environment. We will continue to deliver sustainable value to our shareholders and ultimately our stakeholders. Please [now move] to slide 10.
During the period under review, global economic growth continued at a moderate and uneven pace, with oil markets in oversupply resulting in significantly lower oil prices. The expected increase in the US interest rate, coupled with uncertainty over the South African growth rate, placed the rand-dollar exchange rate under continued pressure.
The average rand-US dollar exchange rate was 10% weaker, with a 33% lower average Brent crude oil price. Chemical prices and margins have on the other hand been much more resilient during the period under review.
The basket price of chemicals in both our base and performance chemicals businesses experienced only a 13% decline in dollar-based sales prices. The Sasol business still remains highly sensitive to significant movements in the rand-US dollar exchange rate and oil prices.
Turning on to slide 11, overall, we delivered a strong Group-wide operational performance as a result of increased sales volumes and significant cost savings contributions across the value chain. This was coupled with improved margins in our chemicals businesses.
Profit from operations of R46.5 billion was up 2% and benefited positively from one-off items of R14.7 billion. This was driven largely by macroeconomic factors, changes to the share price and increasing the useful life of our Secunda and Sasolburg operations to 2050 and 2034, respectively, by securing feedstock.
Headline earnings per share decreased by 17% to R49.76, still ahead of the overall market consensus. Cash [feed] costs remained flat in absolute and normalized terms, following excellent progress with regards to our cost and personnel initiatives. Moving on to slide 12, [indiscernible] the items impacting the change in profits from year to year.
The weaker rand-US dollar exchange rate increased profitability by 15%. This benefit was overshadowed by the lower oil price, which adversely affected profit by 46%. Profit from operations increased by 32%, mainly as a result of the following one-off item and period end adjustment.
Lower depreciation and rehabilitation charges of R3.2 billion as we operationalized our 2050 strategy, a R6.5 billion lower share-based payment charge following the 29% decrease in our share price over the last year, and lastly, lower re-measurement items of R800 million, compared to R7.6 billion in the prior period.
Higher depreciation charges in respect of new plants, as well as inflation on costs, adversely affected profit by 4%. This decrease was partly negated by our cost and cash-saving initiatives, which I will unpack later. We are pleased to report a 4% increase in normalized sales volumes across the Group.
The increase in sales volumes over the last two years contributed 12% to our profit, amounting to R5.2 billion in real terms. Moving on to slide 13, our cost performance is testimony to the manner in which we sustainably deliver our cost and cash-saving initiatives. Normalized cash [fees] costs have remained flat year on year.
Contribution from our business performance enhancement program and response plan resulted in a 5% reduction in our cash fixed cost base, offsetting the South African PPI increase of 5% for financial year 2015. We accomplished this cost performance despite a [rand] challenging South African cost environment in respect of labor and electricity costs.
Our business performance enhancement program delivered cost savings of 4% for the 2015 financial year. Cost savings for our response plans contributed significantly to a further 2.9% decrease in our cost base. Although we -- although overall we benefited from a [greater] exchange rate, the impact of a weaker rand added 0.7% to total cash fixed costs.
Labor, maintenance and energy remained the main drivers of our cost base, with labor comprising approximately 51% of total cash fixed costs. We are mitigating the impact of the electricity cost increase by increasing self-generation and supplying surplus power to Eskom under power purchase agreements.
Moving on to slide 14, focusing on our operating business units, profit from operations in mining increased by 77% to R4.3 billion, mainly as a result of a stellar cost performance, coupled with a 2% increase in labor productivity.
The benefit of our business performance enhancement program, coupled with further operational flexibility, created by the miners' replacement program, resulted in normalized unit costs from our operations being maintained to 2% below inflation. Exploration and production international recorded a loss from operations of R3.2 billion.
Our [indiscernible] operations reported an operating profit of R1.1 billion, mainly as a result of favorable gas prices and a 13% increase in volumes compared to the prior period. Our assets in Gabon were impaired by R1.3 billion due to the decline in oil prices and the [cellaring] of wells.
Our Canadian upstream assets generated a loss from operations of R2.4 billion, mainly due to the lower gas prices, which resulted in a further impairment of these assets. On a positive note, we continue to see lower depreciation in operational costs with our new partner, Progress Energy.
Our focus remains to reduce drilling activity until we see a sustainable increase in gas prices. Slide 15. Underpinned by solid production, our energy business delivered a commendable set of results relative to the current macroeconomic environment. Secunda Synfuels increased liquid [float] production by 2%, with [naturals] delivering a 6% increase.
The southern Africa energy portfolio was positively impacted by a 5% increase in liquid fuel cells volumes and higher refining margins on the back of a strong product differential. Gross margins in this business decreased by only 19%, despite the decrease in oil prices.
Our ORYX GTL joint venture delivered a solid production performance, with an average utilization rate of 90%, despite an earlier-than-planned shutdown.
This was, however, 7% lower than the previous year, and this volume decrease, coupled with the significant drop in oil prices, resulted in our share of profit from the joint venture decreasing to R1.9 billion. Slide 16. Our chemical businesses continued to display [indiscernible] resilience to the lower oil price.
The base chemicals SBU delivered an [increase] in performance, increasing profit from operations to R10.2 billion. Normalized sales volumes increased by 2%. The [diff] has also benefited from the impact of the extension of the useful life of assets in South Africa.
As a [drop] of the R534 million administrative penalty following the Competition Appeals Court decision to set aside the tribunal's decision further enhanced profitability. The performance chemicals SBU recorded another strong performance, underpinned by consistent and reliable operational delivery and a weaker rand.
Profit from operations increased by 7%, to R12.7 billion, whilst operating margins expanded to 18%. Adjusting for once-off profit from operations was up 13%. Sales volumes increased by 2% due to improved production output on the back of higher demand. Our US business benefited from low ether prices and continued to realize healthy margins.
The contribution from our US business amounts to R4.2 billion, compared to R4.1 billion in the financial year 2014. Our European operations reported a 3% improvement in production volumes. Moving on to slide 17, I would like to expand on what David touched on earlier in respect of our business performance enhancement program.
We maintained our savings target to generate sustainable annual savings of at least R4.3 billion by the end of the 2016 financial year. We have achieved actual year-to-date savings of R2.5 billion, significantly above our expected target of R1.5 billion in the 2015 financial year. This represents an annualized run rate of R2.8 billion.
Purchase implementation costs peaked at R1.9 billion for the period, and I expect it to taper off in the 2016 financial year. This cost includes employee separation costs. We expect cash fixed costs to follow inflation from the 2015 financial year. Slide 18.
Our response plan initiative has delivered cash savings of R8.9 billion in the six months since announcement of the plan in January 2015. It is encouraging to see our levers of delivering [indiscernible] savings that are towards the upper end of the expected range.
As part of our response plan, we are currently working to deliver further sustainable cash cost savings of R1 billion annually by the 2018 financial year.
The response plan will provide sufficient flexibility for the Company to manage its balance sheet and execute its growth program whilst continuing to retain maximum sustainable value to the shareholders through dividend payouts. Slide 19. The Board declared a finance dividend of R11.50.
The total dividend for financial year 2015 represents a dividend cover of 2.7 times, compared to 2.8 times cover last year. This dividend is above market consensus and is indicative of the confidence management has in the continued operational performance and cash savings delivery.
Our cash generating abilities remain robust, despite a challenging macroeconomic environment. Our balance sheet remains ungeared at negative 2.8%, and we expect to moderately gear up our balance sheet over the next two years, as we execute the Lake Charles Chemicals Project.
We have a net cash balance of R5 billion, and headroom of R62 billion in our committed facilities as of 30 June 2015. Our liquidity remains strong and was bolstered by Sasol entering a new $1.5 billion revolving credit facility in January 2015. This facility will also be used to partly fund the cracker project.
Our credit ratings remain unchanged at one notch above the sovereign rankings in South Africa. Slide number 20. Our 2016 CapEx estimate has increased by R5 billion to R70 billion, and our 2017 forecast to R65 billion as a result of an impact of the weakening rand.
This increase is offset by the subsequent increase in our cash flow, resulting in our gearing forecast remaining [indiscernible]. I would like to emphasize that this increase is only as a result of a translation effect, there is no impact on our cash flow.
The safety, reliability and sustainability of our operations remain paramount and no compromise will be made in the critical sustenance capital spend. Strategic projects in North America and Southern Africa continue to remain our key focus areas. Slide number 21. Finally, we anticipate ongoing lower for longer oil prices and exchange rate volatility.
We continue to focus on factors within our control and expect overall strong operational performance to continue for the 2016 financial year with [indiscernible] liquid fuel sales volumes remaining above 60 million barrels. We expect the ORYX GTL average utilization rate to be above 87%, above an upcoming statutory shutdown.
Chemicals businesses sales volumes to continue to improve with margins in base chemicals under pressure. And in performance chemicals, we expect varied margins with our different product streams. Our [cost] and [transferring] initiatives to continue to deliver with response plan cash contributions of between R10 billion and R16 billion.
Sustainable savings as part of our business performance enhancement program of R4 billion for financial year 2016 will drive normalized [indiscernible] to remain below inflation. We expect our gearing to increase to a level of between 15% and 30%.
We are financially well positioned to manage our growth plans in the current low and volatile oil environment. On that note, I will hand back to David..
Thank you, Bongani. To retain our flexibility, we've recently refocused our efforts and refined our strategic agenda for the next five-year period. [So we'll ensure] that strategy remains both relevant and achievable in the current and forecast macroeconomic environment. Now looking at slide 23.
And as you can see from the left hand side of the diagram, our strategic agenda is now aligned with our new operating model, identifying in no uncertain terms what each operating entity should be driving up to 2020.
In response to a lower oil-price environment, we're focusing on enhancing our existing assets and on driving selective growth opportunities to create value. To achieve this, here are some of the noteworthy refinements to consider.
First, we are looking at selective gas and liquids opportunities and in tandem we are considering from a commercial sense various technology licensing models. Second, although not a change, we are emphasizing the promise that gas to power has as an important option in Southern Africa.
With our electricity challenges, this can only serve to bolster much-needed power supply. Third, we continue to drive our growth programs, primarily in Southern Africa and the US, although our focus has shifted somewhat from energy to chemicals in the near term.
Of course, our business performance enhancement program and the response plan are both key enablers allowing us to deliver on our strategic aspirations. Putting these refinements aside, our strategic agenda reinforces the importance of a diversified portfolio which ensures resilience.
As we look beyond the end of the decade, we are also fine tuning our longer-term strategy where in the future Sasol primarily remains an integrated natural resource monetizer and a technology leader. Moving onto slide 24.
Over the past year, we continued to strategically position ourselves to advance our gas-based growth programs, concentrated largely in Southern Africa and North America. In South Africa, we've embarked on an extensive strategy to ensure the efficiency and reliability of our in-country operations to the middle of the century.
As part of this initiative, our R14.2 billion Secunda growth program is nearing completion with 16 of the 19 projects achieving beneficial operation. The successful completion of these projects has ensured the full realization of their anticipated volume and electricity benefits.
The remaining three projects are small utility initiatives and are expected to reach beneficial operation by the end of the 2015 calendar year. At the end of May 2015, we successfully commissioned phase 1 of our wax expansion project in Sasolburg.
This was a significant milestone and marked another step towards expanding our Southern African operations, as well as demonstrating our commitment to South Africa through ongoing industrial investment. Phase 2 of the wax project has commenced and is expected to be commissioned during the first half of the 2017 calendar year.
Supporting Southern Africa growth, the Mozambican gas industry is placed to play an increasingly important role in the regional energy landscape. In February 2015, we submitted our field development plan for Pande and Temane production sharing agreement to the Mozambican authorities.
The PSA FDP proposes an integrated oil, LPG and gas project adjacent to our existing petroleum production agreement area. Should the FDP be approved, we have also submitted a proposal to enable the development of a fifth train at our central processing facility to process additional gas from the PSA license area.
Looking now at slide 25 and North America specifically. During August 2015, Sasol and our partner Ineos successfully concluded a [indiscernible] manufacturing joint venture known as Gemini HDPE. Construction of a high-density polyethylene facility has commenced in Texas and plant start up is planned towards the end of the 2016 calendar year.
The complex will produce 470 tons of high-value bimodal HDPE annually. Also in the US and following our final investment decision to proceed with the ethane cracker, [indiscernible] complex in Louisiana, significant progress has been made in detailed engineering and infrastructure work.
The keynote of expenditure to end FY15 was $1.8 billion with the total amount contracted equal to $4.9 billion. At the end of July, $2.2 billion has been expended and $5.3 billion under total contract. Construction activities are proceeding as planned with site preparation work for major units nearing completion.
Note that we are still on track for stage completion of all units during the 2018 calendar year. To my final slide, slide 26. To protect shareholder value given the global circumstances, we are ensuring that our regional operating hubs continue to focus on stable, reliable and safe operations while delivering at record output levels.
Our diverse portfolio, supported by the resilience of our chemicals, mining and downstream refining businesses, enables us to maintain solid results during a lower oil price environment.
Our strategic business units continue to perform and through our proactive cost optimization and cash conservation initiatives, we are achieving sustainable efficiencies and cost reductions throughout the Group.
Looking beyond the here and now by refining our near-to-medium term strategic agenda and by prioritizing selective growth projects, we are able to protect our balance sheet and in turn continue to deliver shareholder value.
If cash flow generation remains strong, the management team and I are confident that our refined strategy and focused efforts will ensure long-term profitability for Sasol. With that, let me now turn it back to the operator who will open it up for any questions that you may have. Operator..
[Operator Instructions]. We'll go first today to Jarrett Geldenhuys with Investec..
Hello everyone. Thanks very much for the opportunity and first of all congratulations on what I also interpret to be a very good set of results. Just in terms of some of the cost saving which I suppose we can still extract further. I'm quite interested in the mining costs which were very well contained.
I just wonder if you can give us a bit more color as you move into the newer mines, how much more potential savings there could be just given the fact that they will be newer and closer to -- well, I suppose closer to operation to some extent? And then also just another question quickly on gearing.
I know you've given us some nice guidance between 15% and 30% for next year. Can you potentially just give us some kind of color on what your FX assumptions are in that arranged broad band and where you'd see that peaking giving the peak part of the CapEx for the US? Thanks very much..
Thanks Jarrett and thank you for the recognition on the results, it's appreciated. Mining costs, I'll turn it to [indiscernible] and Bongani. Do you want to take on mining costs, we've got new mines coming on, much more productive [indiscernible] already this year and Shondoni next year.
Just give us a little color on where we think mining costs are going..
Yes, Bongani here. If I might respond to that. Our anticipation is that in spite of the [late buy] increases, we see the costs being slightly below South African inflation..
Okay, thank you. Gearing, guidance of 15% to 30%, Jarrett, like you said, in FY16. We see a peak gearing rates 38% to 39% is what we're looking at right now. On FX, can we give them some color on the assumptions? Rand of between 12.50 and 13.50 is what we're looking at in the assumptions on that. Thanks Jarrett..
We'll take our next question from Sean Ungerer with Avior Capital Markets..
Good afternoon everyone, just three questions please.
Just in terms of the expected CapEx for the cracker, I know it's still fairly early days but do you still see any opportunity to bring that down? And then just secondly with the spread obviously hovering at 50, below 50 at the moment, when does the dividend cover that was revised this year become a problem for you guys? Or when do you think it will at least? And then just lastly, in terms of the volumes out of [Synfuels] it's really good, solid production there.
I think it was about 32.9. How much upside do you guys foresee or was that a new sustainable number? Thanks..
Okay, let me just see if I've got these right. The first one was on cracker capital costs and if there's any, if you will, upside on that..
Yes..
This question was on Synfuels production, is there any upside there going forward.
Could you just -- did someone get the second question? It was garbled?.
Yes, sorry David..
Thank you, breakeven levels at operations. So we do have Steve Cornell on the line from Houston, CapEx [indiscernible] right now on the cracker is still tracking to $8.9 billion, still have a good level of contingency being held by ourselves.
So we've had good results with obviously the downturn in the industry -- in the oil and gas industry and the lower oil price, we've been able to go back and negotiate, if you will, with all our contractors on fees and on some of the contracting rates as well. So that has helped us. But right now we're still tracking at $8.9 billion.
I think, like you said, it's a little early to start trending away from that number.
But as I said in the prepared notes, they're making good progress on the project and with a focus on utilities and [off sites] right now getting the engineering and procurement on the utilities and off sites to get up to speed with our process units which are all on track, basically, progress wise.
So yes, Steve, do you have anything to add or is that sufficient?.
No, I think that's sufficient. We've made good progress where we can, have some opportunities, you always have some unexpected increases on the other side. We're very comfortable with the $8.9 billion and look like we're going to continue to track on that level..
Thank you. Breakeven costs, I'd be guessing, I think I know there but go ahead, Bongani..
The breakeven cost is -- would sit just below $40 per barrel..
Cool, great..
Then on Synfuels, we had a great year. 32.9 million barrels and that equates to, in the old way of talking about it, about 7.7 million tons for FY15, 3.9 million tons of liquid fuels and 3.8 million tons of chemicals.
As you heard, we're talking about over 60 million barrels from a liquid fuels sales volume perspective and guiding at Synfuels right now about 31.7 million barrels. So down slightly from this financial year but possibly some upside to that. But those are the numbers as we see them right now. Thanks, Sean..
We'll take our next question from Alex Comer with JPMorgan..
Hi guys. A couple of questions here. I notice from your remuneration report that there were some specific targets for Phoenix in for 2015. I just wondered if you could let us know what the threshold and the stretch targets are for cost savings for 2016? That's the first question.
Also just on chemical prices, they've been pretty firm in the second quarter and are starting to come off now.
I just wondered what your expectations are for chemical prices, particularly [indiscernible] in the next couple of months? And also, what your exposure is to contract and spot ethylene prices in the US? Then maybe you could give a little bit more information on the costs and timing of your Mozambique explorations?.
Thanks, Alex. Remuneration I think we've got that for the threshold and stretch for FY16. Go ahead Paul. Paul Victor is joining us..
Good afternoon everybody. Yes, so basically from a stretch target perspective, what we have done for our cost targets was incorporate our project Phoenix as well as our response plan. So with our Phoenix, we've mentioned before, we plan to achieve R4 billion of cash cost savings in financial year 2016.
And then we provided guidance between R4 billion and R7 billion on the cost savings for the response plan. And all of this has been built into our targets. If we achieve effectively the response plan and project Phoenix cost objectives, then effectively that becomes the 100% target. You have to outperform that for a stretch target.
And it's -- and in a very narrow band below that, if you miss the target then effectively you will go through the zero scoring range. So it's very narrow on the down side but a long stretch on the up side. But effectively, 100% for all your response plan and Phoenix targets being met..
Thanks, Paul. Now on chemical prices, as you heard, in FY16 base chemicals margins will come under some amount of pressure and performance chemicals -- on the performance chemicals side, those margins will be varied depending on which product we're talking about.
So maybe I could ask Fleetwood to give a little more color around [surfactant] and [ethylene] prices that Alex is looking for..
Thank you. Alex, yes, the view on surfactants pricing going forward is that we had a very stable year and as a matter of fact, we've been able to grow some volumes, sales volumes in that specific area. Our expectation's that it's going to remain robust in this coming year.
Looking then into the question regarding spot ethylene price, yes it has come under pressure lately. You also need to take into consideration that we are taking that benefit also downstream into the derivatives. So that margin flows through in our downstream products in that sense. But we believe that will also recover.
And as we start to minimize our exposure to the spot ethylene price, remember that by the end of next year with Gemini we would consume most of our spot ethylene that we currently sell into the market, so that would mitigate that exposure.
As well as we ramp up our [indiscernible] project, we may find ourselves towards the end of next year, early year thereafter that we would be almost a net buyer of ethylene before the big LCCP cracker starts up. So I think yes, it will soften but I think we still have a solid outlook to most of the other product groupings.
The part that is really under pressure, we know that, is the base chemicals which is mostly affected by the lower oil price [indiscernible] play into the ethylene derivatives and propylene derivatives and we also foresee some interesting new capacity coming into play as of next year in the Middle East and that would also put further pressure on our polymer prices.
So that's more or less the view..
Thanks, Fleetwood, thanks Alex for the questions. I think we'll move on now, operator..
We’ll take our next question from Gerhard Engelbrecht with Macquarie..
I'm sorry, operator, let me just talk to Mozambique for one second. I turned my page there. timing and costs for Mozambique, the PSA development, the field development plan for tranche 1 of the PSA development as I said, was submitted in February. We're awaiting field development plan approval. We think in the October timeframe.
Certainly before the end of the year and possible as early as October. The ultimate program is just over $2 billion that we'll be investing in tranche 1 of the PSA development. The gas [indiscernible] reserves obviously we've got to pipe some wells before we can make the call on the ultimate reserves there.
But the first port of call is to produce 400 megawatts of power in Mozambique and we're looking at a study to take that gas into power generation in Mozambique, that would be the first project that would be assigned to that gas as it becomes available. And we've also obviously got the oil reservoirs and LPG which is very interesting for us as well.
So timing wise, Riaan, do you have timing as far as start up?.
Completed, pending -- good afternoon, it's [Riaan Rademan] -- depending on the FDP, field development plan approval, the expected completion is by 2019..
Good, thank you. Okay, operator, now we can proceed..
And [indiscernible] Gerhard Engelbrecht with Macquarie..
Good afternoon, thank you. I have a couple of questions as well. David, you said at the outset [indiscernible] water price to fall at some point. What --.
Sorry, operator, could you turn up the volume of Gerhard, please?.
Please go ahead, again, sir..
Okay.
Can you hear me now?.
That's better, thank you..
Okay, you said at the outset of the presentation you expected the oil price would drop. What is the time [technical difficulty] selling oils at this point? That's my first question.
Just looking at [technical difficulty] benefits from EPU5 C3 stabilization yet? [When] do you expect the full benefits to come through? And then lastly, what is the end game for you? You keep on spending, more gas is being produced in the [technical difficulty] and moving west in North America.
It's not quite clear what the [technical difficulty] what for you is the end game?.
I think you asked about oil price to start with and where they're going? [Multiple speakers]. Can we at least try that one? Can you talk to EPU5, it's up and running at 47,000 tons. I'm not sure if we're quite at full capacity, almost. But Bernard Klingenberg here will talk to the EPU5 C3 stabilization status, if you will.
We didn't get your first question but Bernard can you take the chemicals questions?.
Thanks, David. So the EPU5 is running, is running well. We haven't seen a full year of benefit yet. So in the coming year, we'll probably see more benefit from EPU5. But I'd guess the true value chain's running well. There has been some benefit from C3 stabilization already but again, not a full year.
There's other knock-on effects apart for the value chain that we're working on. So we'll see significant benefits in the financial year 2016. Both of those projects. More benefit than we've seen in the last year..
Did you [touch on] the C3 expansion? I don't think you did [multiple speakers]..
But also on C3 expansion, propylene -- basically propylene expansion, polypropylene expansion, that's another 105,000 tons in FY16 that we'll talk to everyone about on the roadshow as well, Gerhard, so that's another thing to consider.
Again, we didn't get the first question but the last question I think was on shale gas in Canada and the path forward. We're still obviously very excited about that play and de-risking it to figure out how much liquids we have in the Cyprus side; we've got very few rigs on.
Can we have a little more color on the study that we're doing?.
So we've committed to our Board to come with a strategy in the first quarter of calendar 2016. And we believe there is still upside value, obviously the current gas prices and the carry that we still have puts us under pressure there. But the operation we have [indiscernible] energy, we've seen productivity improvements and also cost coming down.
So yes, we're cautiously still optimistic of fully utilizing the [site]..
Thank you. Gerhard, we'll get back to our first question when we see you tomorrow, sorry about that. Operator, we've got time for another question..
We’ll take Nishal Ramloutan with UBS..
Hi, yes, good day guys. Just two things from my side. The one is just a good performance on cost and, as you say, you've beaten the R1.5 billion target you had this year by about R1 billion.
Just on next year's target, why is it still being intended R4.3 billion? is it just the case that you've actually realized cost savings ahead of time or have you actually realized cost savings, or have seen more cost saving than you expected? So maybe just on your guidance for next year, why is that still remaining flat? Then the other one is just in terms of -- again, good performance on your working capital.
I'd assume a big portion of that was from revaluing your inventory at lower prices.
Can you maybe give us an indication of what you've been doing there and how much of that was actually revaluing the inventory?.
Okay, thanks Nishal. Let me address the first question on the business performance enhancement program target and let me say, we're going to get R4 billion in savings -- up to R4 billion annual savings this financial year with an exit rate of the R4.3 billion.
We're comfortable with that number right now and I think I would just draw your attention to the fact that we're saying at least R4.3 billion. I think that's about as much guidance as we want to give right now.
As we get closer, we'll continue to update you but best guidance right now is at least R4.3 billion and potential upside, I guess I'll just leave it like that.
Okay, so on working capital and inventory, what are we doing there to drive that performance?.
Well if I might respond to that. You would assume that the cash generated from operations was pretty strong, it only came down by 5.7% but it was helped by the working capital as you correctly pointed out.
The breakdown of [indiscernible] R2.5 billion benefit on the capital credit [indiscernible] R1 billion on the response plan initiative and finally R2 billion on price..
Great, thanks Bongani and thanks Nishal for the questions. Thanks for calling in today, Bongani and I are looking forward to visiting with many of you in the coming weeks on our year-end roadshow trek. And until then, please stay safe. Thanks very much, thanks operator..
Ladies and gentleman, thank you for your participation, this does conclude today's conference..