SIKI MGABADELI: Sasol reported a 14% increase in headline earnings per share to a record R60.16bn. Synfuels production volumes of 7.6m tons were the highest in a decade for the group, and they declared a dividend of R21.50/share.
David Constable is CEO and joins us now on the line. David, thanks for your time this evening.
DAVID CONSTABLE: Thanks, Siki. Good to be with you.
SIKI MGABADELI: Well, let’s look at the past three years and the way in which you have really repositioned and re-energised the group. I suppose these results are a reflection of that.
DAVID CONSTABLE: Well, we had a great foundation to begin with when I arrived. I’m in my fourth year now. So the ship was going in a good direction back then, but we have certainly been able to make some key changes to the group in the past couple of years that have really streamlined our structures and our new operating model, which is much more fit for the future.
And, as part of that, we’ve been able to contain costs this financial year below inflation – 1.8% below South African PPI. That’s the first time we can say that in a decade as well. So things are going well.
SIKI MGABADELI: And what are some of these key changes – just so your investors and those who are listening, looking at the company, can understand what you have been doing.
DAVID CONSTABLE: The biggest thing is we really took a good look at ourselves and we wanted to make Sasol the best company it could be. What we found was – certainly from a business complexity and an organisation complexity, even process complexity standpoint – we were pretty bureaucratic and complex over the years as we made acquisitions. And so a lot of the internal transactions and dealing with our companies internally somewhat took the focus away from an “external face to customers” standpoint. So a lot of it had to do with streamlining, like I say, our operating model and our structures.
We’ve moved from 16 businesses down to six businesses. We took our 40 functions down to 19. And, like I say, we’ve moved from a product-based operating model, where your businesses run everything really from upstream all the way through to selling the product and dealing with the customer, and took that into an integrated value-chain business model, where we have segregated our upstream businesses – coal and oil and gas, the operating hubs where we make our products – and then downstream strategic business units which are customer-facing. And there are just four of those now, down dramatically.
SIKI MGABADELI: Now if I’m not misreading this, you made roughly 75% of your operating profit from South Africa?
DAVID CONSTABLE: Ja, it runs around that level here.
SIKI MGABADELI: Are you happy with that, given the current economic environment?
DAVID CONSTABLE: We are a proud South African company. We will be here long into the future and we think we’ve got a lot to offer the region as far as energy goes. I think we want to find more natural resources and monetise them with our proprietary technologies – whether that’s coal or natural gas or oil for that matter – and build gas-to-liquids plants and gas-to-chemicals plants. And gas-to-power plants are also on our radar so we can support the NDP here in South Africa and take the pressure off the grid as well.
SIKI MGABADELI: What about shale gas in the Karoo?
DAVID CONSTABLE: We’ve got experience in shale gas. We have between seven and ten trillion cubic feet up in Canada with our partners, Progress Energy. And so we’ve got good experience on the regulatory frameworks that are required and the environmental standards that are required to frack shale gas in an environmentally friendly fashion.
We’d like to, as appropriate, bring that experience here to South Africa, and so we are watching it closely, the Karoo, and we’d like to participate if in fact it can be economically viable to lift that and do it in a responsible manner for the environment. But that’s some way yet, and the government needs to give us more direction there as well.
SIKI MGABADELI: Just out of curiosity, what sort of lessons did you learn in the Canadian experience, particularly around the concerns that are being raised around the environment?
DAVID CONSTABLE: You know, the technologies of fracking have been around – I’m from Alberta, the next province over from British Columbia, where we have our gas. It’s a big oil and gas province. There are about 167 000 fracked wells in Alberta going back to the 1930s. So fracking is not new. That is how you get oil and gas out of the ground.
What’s new is drilling down and drilling horizontally into the shale rock so you can get at it, because it’s structured horizontally and not vertically. So once you get down through the water table, which is very shallow – you think of a water table at maybe 300 metres – you get your concrete cement casing set through the water table. Then you’ve got another 3 000 metres to the shale. So, as far as affecting the water table, it’s really not going to happen, as recent studies have shown in the US.
And another thing you need to look at is making sure that you are a responsible user of water, and we cycle as much of the water as possible. You frack a well for about three days, so you use water for about three days on any given well. And then you can recycle – 80-85% of that water is recyclable. And then the final thing is using fracking fluids that are environmentally friendly. You need viscosity, so you need to think about using things like dishwashing soap – that’s the type of material that you use to frack with, and it’s non-toxic, obviously. So those are the types of things we’ve learned and certainly it’s something South Africa should be taking a look at in the future.
SIKI MGABADELI: As we wrap up, just a quick look at North America. You now have your permits for your projects in Louisiana there. What’s next now? Is the financing in place?
DAVID CONSTABLE: Ja. Very exciting to get the air and water permits for construction, and also the wetlands permit specific to the state that we are working in, Louisiana. The first big project up is the ethane cracker and the derivative chemical units behind it – really an expansion of our existing cracker there. This is more of a business expansion investment rather than a new venture, which is something that people sometimes miss. We are already there and we are building on to our existing facilities.
The final investment decision will be later this calendar year. Everything looks good from a financing perspective – to answer your question – and we’ll be getting started there as soon as we get the green light from the board here later this year.
SIKI MGABADELI: Thanks for your time, today, David Constable.
David Shapiro, I watched the share price down today just 0.1%. Not much of a reaction.
DAVID SHAPIRO: It opened very strongly and I think it came back. If you looked at the US – with Brent oil under pressure – I think all the energy stocks came down. I think that was the major influence and that took us down.
But if you go through the results you’ll just see where the expansion is. It’s well worth reading this and I think in time, while 75% of profits are coming from here, that number is going to go down. There are some very exciting projects that they are going into, particularly the one you talk about in Louisiana. Mozambique is another interesting area, and Kazakhstan, you name it. So I think we are going to see a very different Sasol five or ten years down the line.
SIKI MGABADELI: And it is quite a different Sasol from the one we are used to – just talking to him about this restructuring and the realignment and the streamlining that they’ve done. I didn’t realise it was 16 businesses to six.
DAVID SHAPIRO: Ja big savings. I think they mentioned in the region of R4bn in saved costs there. I still think it’s one of the better companies you must invest in on the JSE.
• Subscribe to a daily email of transcripts from Moneyweb Radio – click here