After the damage caused by the Covid-19 pandemic in 2020, the financial year 2021 will undoubtedly be a period of significant rebound for most African companies. This is evidenced by the turnover of the Algerian giant Sonatrach (#1), which in 2021 soared by 70%. Meanwhile, our latest edition of the Top 500 Companies ranking, which focuses on the performance of companies in their financial year 2020, was marked by a depression.
Sasol’s share price went into a tailspin. The market capitalisation of the Johannesburg Stock Exchange-listed chemicals producer dropped from R221bn ($15bn) to R83bn.
The troubles at the US-based Lake Charles Chemicals Project (LCCP) – informally referred to as the ‘LCCP disaster’ in South Africa – loomed large for Sasol. The LCCP was plagued by cost overruns and brought sizable debt, but its units suffered delays before coming online. The project drew the ire of shareholders and invited scepticism and scrutiny from the market.
The ratings agencies S&P Global Ratings and Moody’s swiftly downgraded the company to speculative grade – also known as junk status – with negative outlooks, adding further fuel to the volatility faced by Sasol. The downgrades signalled that Sasol was at high risk of a debt default. This sent shockwaves through the market.
Sasol executives at the company’s Sandton headquarters quickly devised a crisis response plan and unveiled a programme of action called Sasol 2.0. The latter was not only designed to steer the company through what president and CEO Fleetwood Grobler described as “the perfect storm”, but also to drive Sasol’s long-term objectives.
Sasol 2.0 will make us sustainable in a lower oil-price environment of around $55 or lower.
A portfolio reorganisation, a new operating model, an accelerated asset-disposal programme and balance sheet deleveraging followed. A rights issue was also placed on the table, but as a last-resort option. Sasol stopped paying dividends.
The new operating model is underpinned by the energy business, which encompasses mining, gas and fuels; the chemicals business, which is split into Africa, America and Eurasia; and a ‘leaner’ corporate centre. Its more than 28,000 employees were mostly unaffected when Sasol trimmed its previously top-heavy corporate structure.
Mining is underscored by coal; fuels by liquid fuels and crude oil, and gas. Chemicals house operations in advanced materials, base chemicals, essential care and performance solutions. Sasol has a presence in 27 countries. It co-owns and jointly operates the National Petroleum Refiners of South Africa (Natref) with France’s TotalEnergies. Natref, located in Sasolburg, an hour’s drive from Johannesburg, is the country’s only inland crude-oil-refining facility.
Out of the near-term woods
Two analysts, who spoke to The Africa Report on condition of anonymity, both agreed that, for an organisation that was “sinking at a rate of a hundred metres a second [two years ago],” Sasol has “done a decent job”, but long-term risks remain, say the analysts.
On 21 February, Sasol published its interim results for the six months ended 31 December 2021. The numbers complement the analysts’ assessment that the company is out of the “near-term woods”. In the period under review: Sasol’s market cap recovered to R162bn; earnings before interest, tax, depreciation and amortisation (EBITDA) rose to R31.2bn, representing a 2% improvement; and the company’s net debt-to-EBIDTA ratio has stabilised to 1.3 times, well below the 3.0 times set by banks.
In an interview with The Africa Report after the release of the interim results, CEO Grobler said: “Sasol 2.0 will make us sustainable in a lower oil-price environment of around $55 or lower.” According to him, the initial focus with Sasol 2.0 was to get “all your people, your positions and your operating model in place. We’ve done that”. Grobler told The Africa Report: “We’re now working to improve the cash cost, gross margin, working capital and capital spend.[…] We’ve set targets over a five-year period, from 2020 – the baseline – to 2025, so that we can measure cost, gross margin, working capital and capital spending. We are on track for the longer-term targets.”
The whole refinery operator system in South Africa clearly indicated to [the] government that [the deadline for the clean fuels switchover] is not going to be feasible or practical.
Although Sasol has benefited from improvements in the macroeconomic environment, the recovery in the Brent crude oil price and a rebound in demand for both oil and chemicals, these gains have been offset by production challenges at mining operations in South Africa. In addition, the South African government has set a September 2023 deadline for a switchover to clean fuels. This has implications for Natref’s future. In February, the South African Petroleum Refineries (Sapref) facility in Durban, owned by Shell and BP, gave notice it will shut down production indefinitely at the end of March.
This has raised questions about whether Sasol and Total will make a similar move at Natref. Grobler said: “We have not concluded the option [for] Natref with our partner, Total. We will probably go to [the] market in August with a clear picture. The whole refinery operator system in South Africa clearly indicated to [the] government that [the deadline for the clean fuels switchover] is not going to be feasible or practical.”
Mozambique remains key to Sasol. The company’s infill well-drilling campaign for gas continues and it is making headway in its multimillion-dollar Production Sharing Agreement (PSA). Focus is also still on bringing in liquefied natural gas (LNG) from Maputo into South Africa through existing infrastructure. “The PSA aims to supply gas for monetisation in Mozambique to turn it into electricity. The user of that is the so-called Central Termica de Teman. [It] reached financial close in December. That is the major off-taker from the PSA that we announced,” said Grobler.
The first of the two analysts we spoke to point out that “there has been a bit of a wobble on gas availability. The other thing is that those gas fields in Mozambique are going to run out over the next decade and a half”. To manage that risk, Sasol is “looking to procure LNG from the global market. [It’s] made progress in terms of signing agreements to secure that supply, which is important to Sasol’s future. There’s also a whole bunch of other industrial consumers in South Africa who use gas”, the analyst says.
The second analyst is doubtful about the LNG plan: “This importing LNG doesn’t make economic sense. In my view, they’ll make so little money off it that it’s hardly worth bothering. You’re buying in LNG, you’re sticking it into the Fischer-Tropsch process and you’re turning it into liquid fuels. That only works if you’ve got low gas prices and high oil prices. I am sceptical about the long-term outcome,” says the analyst.
A clearer picture of Sasol’s debt profile is emerging. The company’s balance-sheet deleveraging, supported by the accelerated asset-disposal programme which is nearing completion, is showing results. Chief financial officer (CFO) Paul Victor says the remaining transactions are in the final stages. More details will be communicated at the financial year-end in August.
We don’t believe we’ve got an immediate risk in terms of our maturity profile. We are in a good position.
Notable achievements in the balance sheet deleveraging include gearing decreasing to 59.1% compared to 61.5% as at 30 June 2021, according to Victor. “We have always [had] the objective to smooth our [debt] maturity curve over the next 10 years […]. For 2023 and 2024, we have two big maturities we need to address. We will go to the capital markets to raise further debt in an effort to rebalance our debt maturity,” Victor says.
“We don’t believe we’ve got an immediate risk in terms of our maturity profile. We are in a good position,” says the CFO. In coming months, Sasol will be engaging with the ratings agencies. “Hopefully, they can favourably consider the progress we’ve made,” he says.
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