RYK VAN NIEKERK: In an interview with the Bloomberg News service this week, Sasol said that the company had accelerated the process of selling assets, and was hoping to complete the process by June 2021. Proceeds could realise up to $5 billion, or almost R90 billion, which would halve Sasol’s debt burden.
On the line, I have Paul Victor, Sasol’s financial director. Paul, thank you so much for your time this evening. What does this process of selling assets involve, and where are you currently in the process?
PAUL VICTOR: Ryk, what we told Bloomberg, and what we also announced earlier to the market, is that, unfortunately, as a consequence of the extended lower oil prices that we think will persist into the future, we needed to pay down our debt by $4 to $6 billion. We are looking at a combination of asset sales and a potential rights issue should that be necessary. Our debt currently stands at around $9.5 billion, and we need to reduce that by $4 to $5 billion.
Over the past 12 to 15 months you and I have chatted about this a couple of times, and we have compiled a list of assets that we identified as non-strategic, or in which we just wanted to reduce our equity holding. In so doing we are planning to realise between $4 and $6 billion from asset sales, and to pay down the debt – or to complement that with a rights issue. That is certainly part of our planned long-term direction for the company, focusing on speciality chemicals, as well as our South African energy and gas business; and all assets that don’t necessarily fit within this strategy are the assets that we, of course, would like to sell off to the market out there.
RYK VAN NIEKERK: What appetite do you see from possible buyers to do such large deals during this incredibly interesting time we are experiencing? Is there a great deal of interest in those assets?
PAUL VICTOR: To sell assets during these times is certainly not easy. With Covid and the associated practical implications of getting people around the table to negotiate transactions is of course very challenging. But, Ryk, I think the good side of it is that technology has made it possible for people to deal virtually with one another across the globe, so we have fortunately overcome that problem.
To come back to the value that can be unlocked, the types of asset that we are selling depends of course on who the best buyer would be. We have seen that in most cases there are buyers who can develop a viable business in terms of their strategies in selling an asset. We naturally have a good indication of the value of the asset and, until now, other than for the chemicals businesses, we are not concerned that in the current environment most of the assets being offered for sale in the current circumstances will be at a substantially negative premium discount to the value of the asset sale value.
Chemicals, in the short-term, are a somewhat more challenging market, as we know, but these transactions naturally deliver value over the medium to longer-term, and that’s where we need to get to a point with potential buyers about the numbers. The process is underway regarding several assets. At this point we have encountered no show-stoppers who claim it’s an impossible task, nor have we seen such substantial discounts in value. We are still very hopeful that we will be able to make a considerable dent in our debt by selling valuable assets.
RYK VAN NIEKERK: But selling your assets was never part of the plan, especially not to this extent. That was, of course, until the Lake Charles plant became so much more expensive to complete, which pushed up your debt levels. Did this change Sasol’s strategy?
PAUL VICTOR: I would say yes and no. I think it was certainly not the plan to sell assets to such an extent. But, at the beginning of January/February, the world expected a $60/barrel oil price over the long term in real terms, and now indications are that for a long-term price of $45/barrel in a post-Covid world. And of course, the impact on transport and energy consumption for the global economy (also put pressure on the oil price). So the world has changed substantially.
Then you have to examine your strategy and ask whether you can adapt – yes or no. We consider that in a $45/barrel world the value of asset sales can be so much larger than the debt burden. I’m still looking at our indebted figure of $9.5 billion. So we have added to certain assets in terms of the equity holdings. But in terms of the strategy, we announced in 2017 – when we said we wanted to be a South African player in energy – we still hold to that. We said we want to grow as a speciality chemical producer, and we are sticking to that.
In 2017 we also said that we wanted to play selectively in the field of commodity chemicals, which the Lake Charles largely represents, and it in that area it would be better to exit where we could, and where it would make sense for shareholders. And, of course, we are existing businesses where we made a firm decision to change our strategy – as with our recent announcement that we no longer wanted to be involved in oil extraction in West Africa.
We also said we no longer wanted to be involved in shale gas. We walked away from that as well. So our strategy is now much more focused on Southern African energy, and increasingly on speciality chemicals, and a much greater focus on our commodity chemicals portfolio, which will naturally diminish over time as we focus more on speciality chemicals. So what we are currently doing is more in line with what we want to achieve as a company over the long term.
RYK VAN NIEKERK: The Lake Charles project is the jewel in your asset portfolio. Was it ever planned to sell an interest, and what is the size of the stake that you may now want to sell to a partner?
PAUL VICTOR: When we made the investment decision in 2014, the decision was to retain 100% equity in the asset. At the time the oil price was $100/barrel. As you say, it is a jewel, because the (unclear) costs of ethane have been estimated to remain low. So it’s an excellent asset in a good location near the market, and holding the asset makes sense.
What certainly changed is a significant expansion in the production of global commodity chemicals in the past two to three years in Asia, especially in China. Of course, the reduction in demand has put the globe under such pressure in terms of oversupply of product that we envisage that in the next five to six years commodity chemicals will be under significant pressure. Therefore you need to decide, if it’s not in your long-term strategy to participate in this market, whether you still want to retain a stake in this division of the Lake Charles plant. We thus made a decision to possibly sell approximately 50% of the commodity division of our chemicals business in Lake Charles.
If we cannot achieve value for it, we won’t do it. It is, as you say, the jewel, and one needs to receive value for it, but after the transaction, Sasol will still retain a 50% share in commodity chemicals, and 100% of the speciality chemicals, which represent the other 50% of the equity holding in America (Lake Charles). So, if we do the deal, we hope retain 75% of the old 100%.
RYK VAN NIEKERK: Let’s chat about the possible rights issue. Your asset value per share at the end of December last year was around R356/share. Your share price is currently volatile, but around R140/share; and any significant rights issue on your part will considerably dilute existing shareholders’ holdings. How far from a rights issue are you, and what needs to happen to avoid a rights issue?
PAUL VICTOR: A good question, Ryk. In our announcement to shareholders on March 17, we said that we would adopt a two-step approach to it. First, what is the problem we need to solve? The problem in a $45/barrel oil world is to bring the debt from $9 billion down to $4 billion. This would be achieved by selling assets and/or a rights issue. So you are absolutely correct in saying that rights issues dilute shareholder values, and a couple of months ago our share price was R20. Then a rights issue would have made absolutely no sense. The share price has recovered somewhat, but R140 is still not an ideal value, as you say, for a rights issue. We are very aware of that.
So, in discussions with shareholders, we have said we will come back to them about Lake Charles to say which parts of this asset we want to sell, the value, and to reach an agreement with shareholders that, if they find it sufficient, we won’t do a rights issue. Should it not be sufficient, we will have to come to an agreement about the size of a rights issue. And, of course, given the long-term projection for the company, and what we are going to do to streamline the company and make it more resilient in the prevailing low oil price environment, all these things will in future increase our cash and enable us to pay down our debt.
So the long and the short of it is that a rights issue must really make sense. It must place the shareholders in a better position over time and it must actually be an investment in the company to enable it to operate more effectively and nimbly in future. We are intensely aware of the drivers that essentially go with a rights issue, and at this stage we are only at an initial stage of discussing with shareholders and our board how these potential scenarios could play out.
We have therefore not made decisions yet, and I think a lot will depend on how successful we are with the sale of assets. Some of the asset sales are at an advanced stage and we should certainly be able to decide about a rights issue, as well as its timing and size, within the next two months. I think that’s our current focus, Ryk.
RYK VAN NIEKERK: You said you want to complete the asset sale process by June next year. I assume that the rights issue, should it occur, would take place after June 2021?
PAUL VICTOR: No, definitely not. We’ll have to decide whether we want to do a rights issue in the next year. I certainly do not see it taking longer than next year. Of course, how a rights issue essentially works is you get a consortium of banks to do a soft underwriting. The soft underwriting is for a determined period and in this case about six months. After this period, we would need to renew it with our banks. The banks will, of course, check our progress with asset disposals, and should they decide to underwrite the rights issue, they will continue with the soft underwriting of the rights issue.
So, Ryk, we are under heavy pressure to make a decision this year, and we certainly do not foresee a rights issues next year or thereafter..
RYK VAN NIEKERK: Who is Sasol’s biggest shareholder?
PAUL VICTOR: Sasol’s biggest shareholders are the PIC, the Public Development Corporation, the IDC, the Industrial Development Corporation, and of course the private investors for whom I cannot speak. I might say that our top 20 shareholders comprise about 80% of our total equity holding. So we have many long-term shareholders who have invested in Sasol over many years. Despite the Lake Charles situation and the low oil prices, we have seen those shareholders strengthen their positions over time, so we are dealing with a very significant group of well-known shareholders.
RYK VAN NIEKERK: The subject of job losses in South Africa is an everyday subject of discussion. Does Sasol foresee any job cuts in South Africa?
PAUL VICTOR: At this point, it is very difficult to say. I think we said Sasol 2.0 will undergo further development. In so doing we want to make the company resilient at an oil price of $45 a barrel. Of course, we would need to look at our entire business model, the type of businesses we are in and our cost structures. Once a decision on job cuts has been made in consultation with organised labour, which is naturally an important party to the whole process, as are our workers, we would then explain how it would affect the workforce. Labour, of course, is a major component of our cost structure, and this needs close examination to make the company highly effective. But I think most companies these days find that they do have to look at their cost structures.
We have seen major chemical and energy businesses in the world, such as BP, announce large-scale retrenchments to reduce their cost structures and make them more effective. We will certainly look at all options to become more efficient. And, when we have more detail, I think we’ve promised shareholders that, when we announce our results in the third week of August, we’ll present our plans and explain what it means in terms of jobs.
RYK VAN NIEKERK: Yes, there is currently much uncertainty about Sasol. I think the volatility of the share price shows that as well. When do you think an announcement is likely which says, “Listen, this is Sasol 2.0. We have sorted out all the problems, the debt burden is under control, and we can now determine the value of the share price from the company’s profitability”?
PAUL VICTOR: I must tell you that, when we announce our results in the third week of August, we are planning to announce all the financial deliverables and targets for Sasol 2.0, how things will work, the types of business we will have, and what the overall structures will be. We intend to execute the plan in our 2021 financial year, which runs from July (202) to June (2021).
We intend to have the plan fully implemented by July 1 2021, and at that point to see the benefit of the full restructuring of the company. But the year ahead will be very difficult; many critical decisions are needed in terms of the finalisation of the asset disposal, the rights issue, the financial objectives of Sasol 2.0, and of course the implementation. We will hopefully be in a position to show shareholders what Sasol 2.0 will look like and show them there is value.
Our shareholders are very interested in the progress we are making. And then, regarding our short-term actions to manage the company through this difficult time, shareholders are fairly comfortable that we are almost over the first hurdle. There are two large hurdles ahead – the asset disposals and the rights issue. So we have to get over those two hurdles, and it will, unfortunately, take us 12 months to work through this process.
RYK VAN NIEKERK: Covid-19 – how did this affect you at the operational level?
PAUL VICTOR: Covid-19, Ryk, strangely enough – if you look at the various components of our business, which basically comprises our mining business, our chemicals business, both national and international, and of course our energy business. The energy business has been substantially affected because it is directly dependent on the oil price. Fortunately, we could adopt hedging measures to protect us against an oil price dropping below $30/barrel – though $30 is still very low. We, therefore, did not suffer from the oil prices of $18 and $15. So, from a price point of view, the energy business was hardest hit, but our chemicals business did very well and we did not experience significant price depreciation there.
When one looks at international demand for our chemical products, we did not need to cut back production in terms of supplying our clients, and we were able to sell what we produced.
On the energy side, we had to switch off the Natref refinery, and at Secunda we had to reduce throughput by 70%. That was for six to eight weeks in all. Secunda is back to 100%. After South Africa went down to Level 3 restrictions, the demand for petrol and diesel significantly increased just by looking at the highways. At the end of this month, the Natref refinery will be fully operational again. I think that refinery is somewhat dependent on fuel for the aviation industry where we see a significant decline in demand. So we will adjust that refinery’s production in terms of how much aviation fuel we can produce, and how that will affect the refinery’s entire throughput in terms of other products.
Today our plants are therefore almost 100% operational, except for Natref, which will be up and running in five or six days’ time.
RYK VAN NIEKERK: The Sasol share price is currently around R140, and many large enterprises’ incentive initiatives, such as share options, are linked to the share price. Many senior managers and decision-makers are incentivised by such options to work very hard. What is the prevailing mindset among Sasol employees, and particular decision-makers? I’m sure everyone is working very, very hard, but there does not appear to be any prospects of short term financial gain for this hard work?
PAUL VICTOR: You ask a very good question. In terms of working hard, I must tell you that that is quite evident. I think the entire corporate environment in South Africa and worldwide is experiencing those pressures, and they are massive. I would be the first to acknowledge that. Of course, Ryk, the share scheme is structured in such a way that, if shareholders are suffering, management must be as well. The two drivers must be aligned. And if our share price drops, it has an impact on the incentive scheme. Last year, with the Lake Charles failure, no one received bonuses. This year we have also decided not to pay bonuses as a consequence of the lower oil prices. Shareholders are of course comfortable that management is prepared to go that far. We have cut our own salaries by between 30 and 40% for a few months to protect the company’s liquidity. Of course, when things hopefully improve we will reap the benefits of doing so, and we will have to align ourselves with shareholders.
The good thing is that we know what needs to be done to turn the company around and we know the rewards of success. I think that is a sufficient incentive for shareholders. In two or three years’ time, we don’t want to say that “Sasol is paying huge bonuses to its managers,” forgetting about the times we are working through now. We will have to look back in the mirror at that time.
So it’s not pleasant to receive reduced compensation. But shareholders, and we are shareholders ourselves, are acutely aware that we now have to make difficult decisions to protect the company. I’m able to say that many of these salary cuts are voluntary decisions by employees, and almost 100% of our employees at management level voted for the salary cutbacks, which also demonstrates the mindset of Sasol employees – proud employees who want to see the company turn around – and we are in a good place at this point. A few months ago things were very difficult, but I think we are busy turning the ship around, which is difficult, but the employees are fully behind the company.
RYK VAN NIEKERK: Paul, many thanks for your time today, and good luck with the future.