Sasol is struggling due to debt and poor investment choices.
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“I think it’s a strong, bold message to say we survived the crisis,” Sasol chief financial office Paul Victor tells The Africa Report, adding: “We are back on our legs. We are starting to run again, from
walking.”Sasol, an integrated chemicals and energy producer, has taken a $760m bet on Mozambique while the company continues its retreat from West African assets as part of its speeded-up divestment programme.
The company’s leadership has taken a potentially contentious rights issue off the table and reduced debt. Sasol’s Victor describes the move as a bold statement to the market.
Sasol opened the last week of February with the announcement of its interim results for the six months ended 31 December 2020. The first three months of 2020 were characterised by unprecedented volatility precipitated by the Covid-19 crisis. The three months thereafter saw the re-emergence of coronavirus infections during a second-wave outbreak.
Moreover, the downward spiral of the oil price, the wild swings in the rand/US dollar exchange rate combined with a highly leveraged balance sheet placed pressure on the company to institute a range of self-help measures.
The debt spiral was mostly sparked by the cost overruns incurred at the Lake Charles Chemicals Project in the US.
Deleveraging amid market volatility
In March 2020, Sasol management put forward balance-sheet deleveraging and a rights issue, among others, as part of proposed mitigation measures.
“I think we lost credibility in the market as a result of the Lake Charles Project – and rightly so. But the rest of the Sasol business has performed well. We knew the Lakes Charles thing did not go well at all … when we announced those plans,” concedes Victor.
Six months later, Sasol has shaved off R63.4bn ($4,2bn) in debt and paused the rights issue.
“When the share price went to R20, I think it was devastating for shareholders. If we did a rights issue at that point in time, it would have broken the camel’s back,” adds Victor.
The latest development means “we executed what we promised. We solved the issue. If you were a shareholder at R10-R20, you are now sitting back at R210. You must be happy your investment is back to where it was – and that you didn’t take significant losses,” he says.
At the height of the Covid-19 headwinds and the company’s balance sheet deleveraging, Sasol faced intense market scepticism, which filtered through to a faltering share price.
Previously, Sasol shares traded at highs of more than R500, but plunged to record lows of less than R50 in 2020. In the last week of February, the share price reached R200.
“We sit with a business that is quite investable. I am a shareholder myself. Looking back, I am proud about what team Sasol has achieved,” says Victor.
“Sasol has turned the corner, as we work towards regaining our blue-chip status,” declared Sasol CEO Fleetwood Grobler during an investor presentation about the interim results.
Delivering on debt promise
In the six months leading up to 31 December 2021:
- Debt has gone down to R126.3bn, from R189.7bn in June 2020.
- Gearing decreased from 114.5% in June 2020 to 76% in December 2020. Sasol attributes this to the repayment of US dollar debt and an improvement in the rand/dollar exchange rate.
- Earnings rose to R15.3bn from R4.5bn in the prior period. This was achieved despite a 23% decrease in the rand/barrel oil price.
“In the period, the rand strengthened against the dollar, which negatively impacted profitability but benefited us in the translation of our US dollar-denominated debt at a stronger closing rate,” explains Victor.
“We shouldn’t forget the oil price has only, as of mid-December, started to go up to the $50/barrel mark. We have been profitable in a $43 oil price environment. Few companies have that ability,” Victor points out.
“We have been able to get our debt down. We are making progress in what, I think, is probably one of the darkest years in Sasol and in the world’s modern history,” says the CFO.
“For a company to survive through this and start to pick up, wasn’t an easy feat. That’s why we’re so positive about our results and where we find ourselves today,” says Victor.
In its accelerated asset divestment programme, Sasol targeted $4bn. Thus far, “we have delivered $3.3bn. We’re 80% there,” adds Victor.
He is also quick to clarify: “Remember, those assets are not aligned to our future strategy.”
“We still have around $600m-$700m of assets to go – to get to the $4bn. We’re positive by December, we will reach that target,” he says.
No to Gabon, yes to Mozambique
Sasol’s producing and exploration assets in Gabon are next in line for disposal.
“We are making progress with the divestment of our interest in the Gabon assets, which is expected to be completed by the end of June 2021,” says Victor.
However, Mozambique “is, and will remain, core to Sasol’s business, as the country is central to our gas transformation strategy,” said Grobler.
The Sasol board has approved the final investment decision on the Mozambique Production Sharing Agreement area development. “We are excited to progress this estimated $760m programme,” noted Grobler.
“This capital project allows us to continue delivering on our commitments to Mozambique, and access additional short-term gas supply to South Africa,” said Grobler.
Current reserve estimates show up to 1.2trn cubic feet (tcf) of gas. “1tcf of gas is able to power a 1,000MW power plant for up to 20 years.”
“This will also include the development and export of oil in the latter half of 2024. Our indications are that there is between 7m-21m barrels of oil reserves,” the CEO said.
Victor is quick to dispel any concerns surrounding Mozambique as an investment destination because of a rise in insurgency activity in the country.
“At this stage, no,” says Victor in response to a question about whether Sasol had faced security threats to its business. But, “there were isolated incidents over the past 12 months. All could be easily managed.”
“Remember, our assets are in the southern part of Mozambique – not in the northern part – which is less prone to political activity. Over the past 10-15 years, we’ve had limited impact on our business. Our relationship with the government of Mozambique is good,” he says.
“We’re been as a responsible investor in Mozambique. Most of our plants are operated by Mozambicans – 90% Black. The local content is high. So there is no reason to kind of make us a foreign target, so to say,” concludes Victor.
What about jobs?
Although Sasol has made progress in its bid to repair its credibility and restore its share price to blue-chip status, the company has not declared a dividend. The work on debt minimisation and optimising the business continues.
In terms of the latter, there are no set numbers for job cuts. But “we are in negotiations and engagement with all our labour entities across the globe,” Grobler said.
“However, the majority of the cost [efficiencies] that we will be able to deliver are not necessarily on labour. But on other aspects, for example, how we procure. How we run our corporations and maintenance. How we do that more efficiently compared to focusing on the job number,” Grobler concluded.
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