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Sasol: What happened, and what now?

Poor cost control, no oil price hedge and bad luck all hurt SA’s largest industrial company.
Sasol head office in Sandton. Image: Supplied

It’s no secret that things have been challenging at Sasol, but no one could have predicted the utter collapse that has happened in the past three weeks, effectively wiping off billions of value and resulting in 15-year plus share price lows.

The question is, what led to the company getting to this point – and is there any chance of recovery?

A history 

Sasol is an integrated energy and chemical company that has operations around the globe and is based in Sandton, South Africa. 

The company was formed in 1950 in Sasolburg in the Free State. It was built on processes first developed by German chemists and engineers in the early 1900s. 

A partially state-owned entity (SOE) for most of the previous century, it was one of the apartheid government’s greatest triumphs. It is listed on the JSE and on the New York Stock Exchange in the US. 

Operating business units comprise mining and exploration, and production of oil and gas activities, focused on feedstock supply.

How did we get here?

Several reasons and events have contributed to the collapse of the Sasol share price. Some have been outside the control of management, while others have been fully within its control.

  • Macroeconomic factors

Two major global events of the past few weeks have had a direct impact on Sasol and could not have been forecast. Firstly, the Covid-19 pandemic has resulted in a near shutdown of economic activity. Secondly, Saudi Arabia’s decision to flood the market with supply has resulted in a collapse of the price of Brent crude oil under $30 per barrel. 

Sasol’s own expectation of the price of Brent crude, as per its latest results announcement, was $50-$70 per barrel, hence the company didn’t enter any hedges to protect it from the impact of a price drop. The downturn in price therefore had an immediate impact on the share price.

Sasol – A mighty fall

  • Lake Charles

In 2014, Sasol embarked on a multi-billion dollar project in Louisiana in the US. The Lake Charles Chemical Project (LCCP) was envisioned to lead the company into the future, by diversifying its earnings away from energy and into chemicals.

The rationale was that prices for chemicals are not as volatile as they are for crude oil, and that the cash generation capacity of the facility would enable the company to absorb the initial capital invested quite easily.

Unfortunately, things haven’t turned out as planned. The project was expected to cost $8.9 billion and be online in 2019 at the latest. The cost has now escalated to $13 billion, and the project has been riddled with delays, costs overruns, and mechanical failures. Earlier this year, there was a fire at the facility, and even though there were no fatalities it did raise some questions about it.

Furthermore, the world has changed since the initial project valuation was completed.

The chemicals sector is in a downcycle due to two main structural shifts in the industry: the increased supply of commodity chemicals due to the start up of new Chinese chemical complexes, and the downturn in demand as a result of trade tensions between the US and China.

Sasol management stated in the interim results presentation that the expectation was for the downturn to last for about 18 to 24 months. 

Note that this was before Covid-19. The impact of the virus is such that the initial estimates may be extended for a period longer than two years, which further devalues the expected cash flows from the project now that it is finally in the commissioning face.

  • Balance sheet 

On March 3, Sasol announced that it had received its credit reviews from global rating agencies S&P and Moody’s based on the company’s 2020 interim results.

Read: Sasol keeps hurting investors, but management remains positive

The outcome: S&P affirmed Sasol’s BBB-/A-3 credit rating, while Moody’s downgraded Sasol’s credit rating to Ba1/NP. 

This announcement was concerning to the market, as the company had $1 billion worth of debt due by May 2020 (note there was a provision that enabled the company to roll forward the commitment to May 2021), and a total debt balance exceeding $12 billion. Add to all of this a declining profit and/or earnings base.

Other considerations

In terms of what was noted, and some of the things that weren’t mentioned in the Sens release, investors might want to consider the following additional information:

  • Rompco 

The Republic of Mozambique Pipeline Investments Company (Rompco) is a joint venture between Sasol, Companhia Mocambiçana de Gasoduto SA, and the South African Gas Development Company (iGas) that was formed in 2004.

If one looks at the past interim results, in December the venture achieved R14 billion worth of earnings before interest and taxes (Ebit), representing 5% of the company’s overall Ebit. Although this seems small in the universe of Sasol, the venture does collectively contribute R150 billion to GDP for SA and Mozambique.

However, in 2019, Sasol announced that it could from 2023 no longer guarantee gas supply to its customers.

  • Pollution

Sasol was identified as one of the largest polluters, with its facility in Secunda identified as the world’s biggest single-site emitter. The company committed to comply with legal emissions limits by 2025. In light of its capital expenditure rationalisation and the fact that a plan has not yet been published on how to address the emissions issue, there needs to be consideration in terms of how this will unfold in the coming years and whether Sasol will be able to honour its commitment.

  • BEE

In 2018, when Sasol unwound its broad-based black economic empowerment (B-BBEE) transaction Inzalo and introduced its new scheme, the evergreen Sasol Khanyisa scheme – which include Sasol BEE shares that trade on the empowerment segment of the JSE – the expectation from the broad-based shareholders was for an uplift in value. Based on the past few week’s movements, that is unlikely to happen. Furthermore, considering that there is an upcoming rights issue on the table, the question becomes whether Sasol BEE shareholders will be willing to follow on their rights and, if not, what will happen to their equity holding, which has eroded well over 90% in value.

The way forward

In response to the negative sentiment, and to calm investors and borrowers alike, management issued a range of interventions intended to stabilise the company going forward to ensure its survival.

  • Asset disposal 

As per its interim results announcement, Sasol announced that it would be looking to dispose of certain non-core assets. Due to the current climate, it was reiterated that the asset disposal process would be accelerated and that the expected proceeds from the corporate action would yield $2 billion, which would be applied to reducing the gearing levels.

The big question on the lips of almost every analyst is which specific assets are on the chopping block, and for what value. 

In terms of the business units, there are certain assets that can be deemed non-core, but if one looks at the environment and the sheer desperation in timing to conclude the sales, the assets are more likely not to be sold at fair value, but at a price far lower. The rushed timing would bring out all the vultures, globally.

  • Hedging

Management has proposed entering a hedging strategy to manage liquidity, specifically with regards to the price of Brent crude. In its Sens announcement, Sasol stated that the benefits of the hedging would only be felt at a price of $25. The question that eluded analysts and investors alike, was why this wasn’t the case prior to the oil price crash. Furthermore, when would the benefits of hedging be reflective in the revenue earned by Sasol?

  • Strategic partner

The company stated that it would consider partnership options for its base chemicals business in the US; the assumption would be that this would include LCCP. In hindsight, this decision should have been taken earlier. Also, from a valuation perspective, the company has incurred costs well over $13 billion, and a partner would need to be substantial. And what would they bring to the table, from a project risk perspective? Barring any more technical delays, the LCCP should be producing and starting to generate positive cash flows soon.

  • Rights issue

The company has hinted at a possible rights issue of $2 billion. Some analysts have indicated that if it were to go through it would be the single biggest capital call in JSE history. Notwithstanding that a requirement for the capital raise would be that the asset disposals and certain cost-cutting measures take place. 

One needs to ask how willing shareholders must be to support the rights offer at the current moment, considering that the share is trading under R30 and that any offer to shareholders would need to be discounted. 

What this effectively means is that the share price might decline even further than these historic lows. Thus shareholders wanting to support the rights offer would need to take a very long-term view. 

This is especially true for SOE-related shareholders such as the Public Investment Corporation and Industrial Development Corporation, which together hold 20% of the issued share capital. They would need to ask themselves if there is a better application of capital in other investments in the country.

The road to recovery will be very long, and the current operating model of Sasol needs to change. It is evident that CEO Fleetwood Grobler has a mighty task on his hands.

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One of the very first signs of a company headed for trouble is when they start building lavish head offices. Maybe if Sasol had stayed in Rosebank, their thought and business processes would have been different. But management loves to spend money on itself.

Ditto Discovery

Ditto Webber Wentel (not public company)

Ditto Cell C

” . . . and on the New York Stock Exchange in the US”.

Could the NYSE be anywhere else but the US?

Grobler’s father must have been a Fleetwood Mac fan

Webber Wentzel will be fine; like cockroaches, lawyers will survive a nuclear event.

Exactly. Outright ego-tripping, like SANRAL’s glass palace head office with a floorplan in the shape of a highway sign, built in a plush Pretoria-East suburb with R250m of taxpayers’ money.

and it’s not clear if they will find a buyer for their weird head office…

Sell it to a trade union, Jim would love the office in the corner overhang.

what about the EFF? maybe Julius will hang himself from the overhang :]

Add changes in executive to the mix.

At this share price the hired help are virtually certainly shopping their CV to get into one of the other companies whose share prices have crashed. Not a chance in hell they will hang around for years and years with underwater stock options, even at those base salaries. Perhaps a few of the crashed can simply rotate their hired help and save a fortune in recruitment fees.

Perhaps the buddy committee will re-price the share options.

There are different reasons why someone will buy Sasol. These are not all valid reasons though. The GEPF will take up the rights-issue, not because they like the business model, but because they are unwilling to cut their losses. The PIC and the IDC will support Sasol because of the jobs, BEE and the impact on the economy. Those institutions will be supporting themselves in other words. By supporting Sasol financially, they will be supporting themselves financially. They will kick the can down the road for the jobs and the BEE deal and the ANC.

The next motivation to buy Sasol is the Warren Buffet mantra – to buy when there is blood in the streets.”To be fearful when others are greedy and to be greedy when others are fearful”. Well, the success of this decision does not depend on the efficiency of the Sasol Board members, but on the deficiency of the Saudi Aramco, Russian Rosneft and Lukoil board members. A bet on Sasol is a bet against Aramco, Rosneft and Lukoil.

When we buy Sasol, we are placing our bets on a guy with a knife in his back, running away from a Saudi and two Russian guys. The international commodity industry is a highly competitive environment. Only the lowest-cost producers can survive. Sasol had a moat around their business-model under sanctions and apartheid. Import parity gives them a competitive advantage in South Africa, but when they went overseas they ventured across their moat, they became vulnerable.

Aramco, Rosneft and Lukoil won’t stop flooding the world with oil until they have control of the oil market, and they don’t have control over the oil market as long as Sasol is alive.

I sold 18 months ago at a good high

I bought this week @ 2400

Long term – for my kids – or for wastepaper – but its a gamble and I realise it

The perfect storm, any other time they would have weathered the Lake Charles overruns and turned the corner. A 4 billion over run??? compared to Eskom, peanuts by comparison.

World class tech needs a little management adjustments, and as for the BEE 90% loss, that is the chance you take with equities.

When the Arabs have blown the frackers and high cost production opposition out of the market they will close the taps. They have done this before and it will happen again.

Exactly! Thats what my brain is on. Oil price will rise again,as always.

Crisis happens when no one expects it. A major part of a director’s job is to manage risk.Thus Sasol made the following mistakes:

(1) Not hedging – this was a sitter since the USA has been in its longest bull run. In 2008 the oil price hit USD22 dollars per barrel.
(2) Debt is a killer. The company should have done a rights issue, at the beginning of the project, and should have done it at a premium to the then prevailing share price. Which would have been entirely possible.

Where investors made a sitter of a mistake was to not factor in a contingency reserve for cost over runs (at least 20%). We all know that projects of this nature are always more expensive than anticipated. Look at the Gautrain.

Gautrain started at R7bn and ended at R42bn. GFIP started at R6.6bn and ended at R22bn. And then there are the Eskom new-build dinosaurs, Medupi and Kusile…

Is there any recent example of a massive construction project in South Africa which came in on time and on budget? I would be keen to know.

Also: why can vast armies of highly-qualified and experienced engineers, quantity surveyers and cost accountants seemingly not accurately model megaproject costs to within a reasonable margin, say 15%? I can understand that there are many unknowns in a novel technology like PBMR or Concorde which can blow the budget out of the window, but trains, power stations and roads have been built for over a century and we must surely know by know what they cost.

Computer aided design packages can provide material costs very accurately. Decent project managers can estimate the schedule accurately based on specific assumptions.

No one can estimate the corruption factor on top. Just check out https://www.bbc.com/news/world-africa-51128950

Isobel dos Santos was awarded government contracts where the government in fact paid for her shares in the business.

So true, here is my some of my experiences in the mining industry:

I am one of your “highly-qualified and experienced engineers” but I am double-cursed with a white skin and hair following suit as well. This is not liked by the New Wave Very High Senior management, who is sh-t afraid to loose their mining licenses to a racist regime. So, retrench the Old Guard and hire them back as part-time contracting slaves at a greatly reduced “Fixed Term Employee” salary. Also, just employ them 2 to 3 days a week but blame them when things go south. Like the idiotic foolishness of the young upcoming EE/ AA bosses totally ignoring your advice NOT to take a project from conceptual phase to implementation. To make things worse, this high-tech project is the core mobile data back-bone of their so-called technology in mining advance. One must set yourself up for success, good luck with that.

A great win-win situation where the only winner takes it all and blames everyone else around.

Sasol must be one of the ‘’worst managed companies’’ in South Africa.
What type of management doesn’t hedge its risks?
What type of asset- and fund managers commit their client’s funds into a company like Sasol knowing that their money was at extreme risk do to Sasol’s ‘’reckless’’ no- hedging behavior? Did the fund managers (the likes of Allan Gray, Coronation, Old Mutual Investment Group, PSG, Discovery, Momentum, Investec, Absa, Nedgroup, Stanlib, etc., break the law Pension fund law by leaving pensioners money in that type of high-risk investments?
In all my years as an employee ‘’pension fund’’ trustee, I haven’t seen such reckless behavior by now hedging one of the most volatile commodities on the market.
My view again here is that the Regulators should investigate all these funds and Sasol due to their ‘’ delinquent’’ behavior, at the cost of mostly pensioners (in the short term).

…should read ”by not hedging”

I’m so glad it’s managed by our rainbow nation.

Public and private sector have both dragged SA through the mud.

It’s all of ours to share.

Joint CEO”s: One thing I have learned through the years – Any board that compromises by appointing joint CEO’s are guaranteed to fail!

The decision to hedge is not one taken lightly.
Consider these factors that Sasol’s management to have considered.

There were few if any analysts or market insiders that considered an extended period
in the US$ 30-50 / barrel a realistic prospect, so perhaps a risk worth taking.

Energy commodities are amongst the most volatile of any financial assets.
A bank writing derivatives protection will inevitably price the hedge high and wide
in order to mitigate the subsequent hedging costs they will incur until the maturity
of the hedge structure.

Banks have, over the years, incurred much greater capital costs for holding risk-weighted assets
on balance sheet both from market and counterparty credit risk perspectives. This further adds to
the cost.

If oil moves up and away from US$ 50 / barrel the expensive hedge will become increasingly
valueless and I am sure they would have been lambasted by the 20:20 hindsighters.

Lastly the South African corporate landscape is littered with hedging programs that have been
publicly lambasted as ill-conceived and unwarranted. Think South African Airways with their cross
currency swaps to hedge aircraft leases denominated in US Dollars, Goldfields with their gold hedges
that were incredibly expensive and lastly Anglogold Ashanti whose name change resulted from the
hedge program that Ashanti Ghana has put on around 2000.

Should they have hedged ? Maybe. But it is never an easy decision.

Would it not be prudent to have enough hedges at whatever prices sufficient to cover production costs and the glass elephant and then leave the rest of capacity unhedged for potential profits?

You are a trading desk guy – what would a rolling portfolio of large oil shorts ($25 say) have cost when oil was say $65? I believe the airlines use something similar for the opposite. If oil spikes to $90 the bets pay off and compensate, but I suppose fuel is a relatively smaller part of airline operating cost.

Sasol is a risk investment but the payoff could be material if things go it’s way. Maybe a bet on oil via sbaoil etn and a holding in sasol shares. Risk weight each in your portfolio.

Not only SASOL, but what part of the ongoing exodus of senior management skills (due to emigration) caused SA companies to lose it’s luster over time?

Events happens sudden (like SASOL) as a result of gradual reduction of loss of skills (be it financial or technical). Yes, a company gets replacements, what they can find in the market.(..trying to attract foreign skills…you’re going to have to “show the money”, so you slowly lose your global competitiveness.)

The above is difficult to measure, but has played its quiet, incideous role in its demise. The reducing number of JSE-listed companies (now well under 400) is proof of what the size of SA’s economy once was.

Don’t me get starting on the (lack of) political leadership!

I have had this exact same conversation with my auditors. The loss of Intellectual Capital – especially the over 45+ has been damaging as most companies, SOE’s and State Dept’s could not wait to get rid of the actual skills and expertise. And this comes right back to the previous comment on this forum as to Why so many large scales projects fail. It is the loss of the Intellectual Capital!!! Simple and nobody gives a hoot to rectify because they all simply throw money at the problem. Shareholders/Tax Payers money in the hope it will eventually come right. Idjuts……

Sometimes you just can’t change corporate culture. And the culture sets the company in quick sand

When Sasol was started it was done with taxpayers money. The promise by the then National Party Government was that we as South Africans will get the benefit of lower fuel prices. That never happened. The taxpayers had therefore foot the bill for enrichment at their expense. I was one of those taxpayers. Do I have any sympathy: None whatsoever. Pied Piper me thinks.

Agree with you. No sympathy at all.

I agree with you Christina and DragonX, but you don’t have the full story. Sasol was indeed started with tax payers’ money in the 50s and 60s but when Sasol decided to go private in the 80s they repaid the loan they received from the government in full (whether this was enough, can of course be disputed).

You must also keep in mind that Sasol was in effect acting as a government even when it went private – establishing a town like Secunda, funding police stations, hospitals, roads, stadiums, etc. Before criticising Sasol and wondering where your tax money went to, you should rather ask yourself where SA would have been without Sasol? Established Sasolburg and Secunda, maintaining infrastructure, supplying 30% of the country’s fuel, largest tax payer in SA, direct/indirect employer of 400 000 South Africans, etc.

As you may guess, I used to be a Sasol employer and there are really some good people there. Unfortunately Sasol has experienced a massive brain drain over the years and this is the mess you end up with.

I support Dannymyboy:Christina, because I was part of the Sasol 2 & Sasol 3 projects from August 1975 and just to remind all who most likely do not know and/or forgotten:

BOTH Sasol 2 & 3 projects were finished WITHIN budget, no overspendings AND Sasol 2’s project completion date was shortened with 8 months !! and still within budget.

Do you have any idea what it means to achieve this with such an big project ?!

You achieve this with excellent, qualified, experienced, proud, willing people.

Now what changed to where Sasol is at present 2020 in severe trouble ?

Following Corrective Action, BEE, discrimination against skin colour, etc. the majority of the replacement individuals, from the lower ranks throughout to Top Management were incompetent, over paid and “pay back”-attitude people, who do not want to take advice from “old timers/previous employees” and most of these “old timers” simply left (so called: brain drain).

This comment of mine is not “blame game”, but reality.

There is also a big difference between: Efficient PROJECT-management and subsequent efficient OPERATIONAL-management. (Without this, you contribute to where Sasol is now 2020 and the “blame game” will continue…..

Trying really hard to muster up some sympathy for this company which excluded its incorrectly pigmented employees, or for the poor BEE shareholders.

Nope, sorry, couldn’t do it.

“Gods of Capital , have mercy on this company, an ICON of SA”.
For the sake of all the engineers and employees and all staff and affected businesses i hope this turns around. This business is in too much KAK, like it is literally in a corner , i hope it fights like a tiger to get out this mess coz a boere maakaplan.
Its too easy to criticise in hindsight.

I’m quite surprised that no-one is mentioning anything about the possibility that Sasol could file for bankruptcy. Are you aware that Sasol is hanging on a very thin thread? Do your own research!

At the current international oil price, I fear SASOL is already bankrupt: debt exceeds assets.

LCCP cashflows better start quickly, and Sasol is at mercy of oil price…which is hoped to recover to higher levels.

If none of these two things happen, I think many of us living in inland regions will have to start walking…

Bought at R24, made a quick profit, waiting for R24 again.

Anyone feel like schooling me why oil goes up 15% in the day & Sasol falls 3% ?

End of comments.

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