South Africa: Sasol targets more debt off-loading initiatives

By Xolisa Phillip, in Johannesburg
Posted on Wednesday, 14 September 2022 11:06

A truck is seen at South African petro-chemical company Sasol's synthetic fuel plant
South African petro-chemical company Sasol's synthetic fuel plant in Secunda, north of Johannesburg. REUTERS/Siphiwe Sibeko

Sasol will continue work to further reduce debt after slashing net debt to below $5bn and strengthening its balance sheet, triggering the restoration of its dividend after a two-year drought for shareholders.

On 23 August 2022, the global chemicals and energy company headquartered in Sandton, South Africa, published its annual results for the year ended 30 June 2022, reporting net debt of $3.8bn for the period.

At its Capital Markets Day (CMD) held in September 2021, Sasol said key triggers for the reinstatement of the dividend included a net debt-to-EBITDA – earnings before interest, tax, depreciation, and amortisation – ratio of less than 1.5 times and net debt below $5bn. “As at 30 June 2022, the dividend triggers outlined at CMD were achieved.”

“We won’t stop here,” Sasol President and CEO Fleetwood Grobler tells The Africa Report. “We will continue our work to reduce debt further, so that we are in a better financial position going forward in this volatile environment.”

“The balance sheet is in rude health,” says Sasol’s new CFO Hanré Rossouw. “The management of risk remains key. Our stronger balance sheet will allow us to reduce the need for hedging going forward.”

Price surge

In the period under review, Sasol benefitted from a rally in the Brent crude oil price, which rose 70% and peaked at $92/barrel, as well as a spike in global chemicals prices.

For the period ending 30 June 2022:

  • The company declared a dividend of R14.70 ($0.86)/share.
  • The chemicals producer reduced gearing to 41.8% from 61.5% in the previous year.
  • Sasol reported liquidity headroom of R100.7bn ($6.2bn) “above our outlook to maintain liquidity in excess of $1bn”.
  •  The company had net debt of $3.8bn and gross debt amounting to $6bn, and has R2.2bn on its domestic commercial paper debt and a $1bn bond maturity repayable in August and November 2022, respectively.
  • Sasol reported adjusted EBITDA of R71.8bn and EBIT of R61.4bn, as well as headline earnings per share of R47.58.

Stronger position

Two years ago, Sasol stared down the prospect of a rights issue at the height of the pandemic, when its balance sheet was weighed down by high gearing and leveraging levels as a consequence of cost overruns at the company’s Lake Charles Chemicals Project (LCCP) in the US.

“Our shareholders have been engaging with us over the past two years [and] have been supportive to get to this point,” Grobler says. “We considered a rights issue – that was averted.”

“[During] … all of those tumultuous moments, we [were] transparent with our shareholders. Now, we are pleased to have delivered our much stronger balance sheet, [and are] in a position to reintroduce our dividend,” says Grobler.

However, Sasol’s healthier balance sheet will not translate into upward revisions of its credit ratings by S&P Global Ratings and Moody’s Investors Service because “we are tied to the sovereign rating”, Grobler says.

In October 2021, S&P changed Sasol’s outlook from negative to positive because of significant debt reduction, stronger cash flow generation and liquidity, and restored headroom in its financial profile.

We … [are] evaluated under the South African umbrella. That’s what we need to navigate going forward

In April 2022, Moody’s revised Sasol’s outlook from negative to positive because of “the company’s … adherence to the … deleveraging strategy put in place during 2020”.

“I think they [credit ratings agencies] look if you generate more than 50% of your income or revenue offshore compared to South Africa, then you will pierce that veil of the sovereign rating,” says Grobler. “We are not there.”

“We … [are] evaluated under the South African umbrella. That’s what we need to navigate going forward,” Grobler says.

LCCP suit

Grobler took over in November 2019 following a board-directed shake-up of the company’s executive leadership, which resulted in the dismissals of its joint CEOs, because of problems pertaining to the LCCP.

Although Sasol results for 2022 show that the company has weathered its LCCP-linked balance sheet leveraging troubles, the company faced a class action suit filed in a Federal District Court in New York for breaching federal securities laws because of the LCCP.

Following mediation between Sasol and the plaintiffs earlier this year, the parties reached a provisional settlement in February 2022.

“On 18 August the [US] court ruled that they support the agreement,” says Grobler. “They’ve signed off. The case is basically closed.”

“Yes, it is good to close that chapter. I do think it is in no one’s interest to go into any class action suit – even if it’s a clear-cut case that we were not at fault. We thought it [would be good] to close out and move on,” he says.

Debt management

On debt, Rossouw says “effectively, all of our debt is in dollars” and “the great thing about a balance sheet that’s strong is you’ve got flexibility”.

A key focus of Sasol’s refinancing strategy is shifting more of the company’s dollar debt into rand-denominated debt “that will better match our cash generation”, says Rossouw.

“In terms of refinancing, we’ve got $2.8bn [that expires] in 2024 and [other] dollar debt. In November this year, we have a $1bn bond that needs to be refinanced. We’re comfortable there’s a range of options to refinance that. We’ve got an RCF [revolving credit facility] we can use as a bridge [and] as an interim measure to balance the effective refinancing of dollar debt with rand debt.

“We can use existing cash flows, and then we will look at other instruments as well. We are targeting lower debt in absolute terms,” he says.

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