Shareholders cannot complain that Sasol is keeping them in the dark. As promised, management hosted another of its investor updates to report on the progress of its recovery plan, with CEO Fleetwood Grobler and CFO Paul Victor discussing how things are going.
Grobler’s opening remarks are worth noting: “It was an extraordinary year. The crude oil price collapse could not have happened at a worse time for Sasol. It was our toughest year on record.”
The investor update follows the formal announcement earlier in the morning that most of the conditions for the sale of a 50% interest in a portion of the Lake Charles Chemical Project (LCCP ) have been met and that Sasol will soon receive $2 billion cash to bolster its stressed balance sheet.
Sasol announced earlier that it would enter into a joint venture with LyondellBasell in respect of its base chemical business at LCCP which will result in the latter buying a stake of 50% in the unit.
The transaction was approved by shareholders at a general meeting recently, which gave rise to the establishment of the Louisiana Integrated Polyethylene joint venture which will be managed by LyondellBasell.
“Under the terms of the transaction agreements, LyondellBasell will operate the joint venture assets on behalf of the venture and market the polyethylene products on behalf of the two shareholders,” according to the announcement, which states that the proceeds of approximately $2 billion will be received within the next few days.
This is but part of Sasol’s ongoing restructuring process.
Grobler says the sale of assets slated for disposal is going well, actually ahead of schedule. The target to raise in excess of $3.5 billion in asset sales has been largely achieved, with agreements in place for the majority of the disposals.
“We are moving away from businesses where we do not have a competitive advantage,” says Grobler.
Once again, Grobler outlined the need for change. The first goal is to stabilise Sasol financially in the short term by reducing gearing and to restructure the group to operate competitively in a volatile macro-economic environment that usually translates into low oil prices.
While Sasol’s stated objective is to position the business to be “resilient” in an environment of an oil price around $45 per barrel, the latest presentation creates the impression that the Sasol of the future will be quite happy there.
Management mentions in the presentation that the SA operations of Sasol 2.0 will be breaking even at an oil price of $30 to $35 per barrel and an exchange rate of R15.70 per dollar.
Victor says the renewal of Sasol is based on clear targets. “The aim is to make Sasol more competitive and enable the group to generate strong cash flow.”
The group has set four main targets:
- Reduce cash fixed cost by 15% to 20%, equal to a reduction of total overheads by between R8 billion and R10 billion. This will be achieved by building efficient operations and reducing costs to levels comparable with the industry.
- Increase gross margins by 5% to 10%, which will yield additional income of R6 billion to R8 billion. Once again, Sasol mentions that more efficient operations are the key, together with optimising its portfolio of businesses towards more lucrative speciality and performance chemicals.
- Reducing capital expenditure to between R20 billion and R25 billion per annum, mainly by prioritising capital spend.
- And reducing working capital to levels found elsewhere in the industry, which translates to reducing working capital within Sasol to around 14%.
The formal announcement published on the JSE Sens service on Wednesday morning also advised shareholders that Sasol has successfully renegotiated the conditions of its debt levels with its bankers. “Sasol is also pleased to announce the successful conclusion of discussions with our lenders regarding the covenant amendment for 31 December 2020, which is 4x net debt: earnings before interest, taxation, depreciation and amortisation (Ebitda),” reads the announcement.
In addition, the lenders have agreed that the covenant calculation will not be impacted by once-off events or any delay in the receipt of proceeds of the disposal of the LCCP units (due December 31).
Both Victor and Grobler seemed more at ease with regards to the debt issue in their presentation to investors, quoting success in reducing costs, reducing debt by way of disposals and improved cash flow, and the prospect of strong demand for energy and chemical products.
Clear road map
Victor put a clear road map on the table: This year is the year to reset the balance sheet, 2023/24 is the year to drive free cash flow and reduce debt to two times net debt to Ebitda, and 2025 and beyond is the time to enhance shareholder returns.
While the option of a rights issue is still on the table – depending on the success of squeezing efficiency and cash out the businesses, as well as general economic conditions – the two top managers at Sasol were even talking about dividends in a few years’ time.
They also mentioned that the new Sasol must be in a position to consider new investments and enhance shareholder returns by way of a share buy-back.
It is very interesting that Sasol management is upbeat about the prospects and actually making quite significant promises.
The most noteworthy is the aim to restore Sasol as a blue-chip investment.
Sasol is one of the most popular and widely owned shares in SA, with most unit trusts and pension funds owning some.
The latest annual report notes that Sasol has more than 175 000 shareholders owning some 84% of the shares, including shares held by unit trusts, asset managers and pension funds (nearly 50%).
Despite Sasol’s international exposure and its listing on global markets, some 70% of the shares are still owned by local shareholders. This equates to some R53 billion at the current share price – reason enough for Sasol topping the lists of shares that investors watch the most on all the popular share trading platforms in SA.
Listen to Nompu Siziba’s interview with Sasol CEO Fleetwood Grobler (or read the transcript here):