INSIGHT: Sasol shareholder pressure builds on debt, low carbon future woes

Author: Tom Brown

2020/11/25

LONDON (CIS)--Shareholders in South Africa energy and chemicals group Sasol expressed their views remarkably strongly at this year’s annual general meeting (AGM) on 20 November.

The company is beset by problems, the low oil price and the Lake Charles Chemical Project (LCCP) cost overrun just two of them. Creating a company that is fit for the future has been the challenge for some time now.

How do you realign a coal to oil and chemicals company into one that can function adequately in a lower carbon economic environment?

Investors should have a better idea of what ‘Future Sasol’, the term adopted by management to describe the company’s future proofing strategy, looks like at an investor event on 2 December.

A significant proportion of shareholders voted against non-executive reward motions at the AGM, clearly venting their frustration with non-exec remuneration. The company did not have to consider an attempt to force a link between its climate goals and executive pay and rewards.

Sasol is in a particularly difficult position in the current lower oil price environment and, while it battles against the impact of the Covid-19 pandemic on its businesses and operations, it has to invest to further reduce its significant carbon dioxide (CO2) and greenhouse gas emissions.

Sasol has had to manage spectacular cost overruns at the US complex – a 1.5m tonne/year steam cracker and downstream polyethylene (PE, 890,000 tonnes/year), ethylene oxide (EO, 350,000 tonnes/year) and ethylene glycol (EG, 250,000 tonnes/year) and more specialised chemicals project.

It hit a period of maximum gearing in the most recent financial year, which ended on 30 June, as the Louisiana chemicals project neared completion.

In its fiscal year second half, Brent crude hit a 21-year low while the pandemic put even greater strain on its balance sheet.

HEAVY POLLUTER
Sasol is looking at carbon offsets, CO2 sequestration and other measures to help further reduce its greenhouse gas emissions. But the company is a coal to liquids producer and, as such, is restricted in what it can do.

It is talking to Air Liquide about the French company acquiring the massive oxygen plant at Secunda in South Africa, where Sasol coal gasification plants are mammoth greenhouse gas emitters.

According to company data, in total, Sasol emitted 56.5m tonnes of CO2 equivalent greenhouse gases in 2019.

“In South Africa, our large GHG [greenhouse gases] profile necessitates a key role for us in supporting the country’s transition to a lower carbon economy, both as a business and social imperative,” the company said in a climate change report issued last year.

It is trying to balance the pressure it is under from stakeholders to perform and to change, while at the same time supporting economic growth and business development.

DIVESTMENTS 
The sale to INEOS of its stake in the Gemini PE partnership, announced earlier this week, further reduces Sasol’s footprint in the US and seems to mark the end of the company’s global expansion ambitions for the time being.

Aside from selling down its stake in the joint venture, the bigger deal for the company this year has been the agreement to sell half of the base chemicals assets at the Lake Charles complex to LyondellBasell.

Sasol CEO Fleetwood Grobler said at the time of the announcement of that deal, in October, that the US olefins and polymers specialist could take full ownership of the assets in future.

If LyondellBasell were to take full ownership of the large-scale commodity chemicals assets, that would leave Sasol with the more specialised Guerbet and Ziegler alcohols, surfactants, and ethoxylates production at the site.

Aside from some scattered alkylbenzene and phenol assets, the Lake Charles specialties would be the last vestiges of Sasol’s grand North American ambitions, leaving the bulk of its remaining chemicals presence outside South Africa in Marl, Germany.

Although prompted by the “perfect storm”, in Grobler’s words, of a crashing oil price and surging global pandemic during the year the company hit peak leverage multiples to bring the delayed Lake Charles complex over the finishing line, the retrenchment is in keeping with strategy.

Chastened by the extent that delays and technical issues bloated the budget for Lake Charles, the co-CEOs that ran the company before Grobler said that the debacle had caused them to refocus on more manageable investments of $500m-1.0bn.

The US divestments are likely to help Sasol complete the structuring of its debt facilities by the end of the calendar year but come at one of the lowest moments for the market in living memory.

The purchase of the brand new Lake Charles assets stake cost LyondellBasell $2bn, giving it – in conjunction with a 50/50 polyolefins joint venture in China with Liaoning Bora Enterprise – the equivalent of “full capacity of a new and operational world-scale cracker complex with little exposure to risks from project execution”, CEO Bob Patel said at the time.

The price tag was at least $1bn below the replacement cost for a 50% stake in the assets, Patel added, while it cost INEOS $404m to acquire the 50% outstanding stake in the 470,000 tonne/year high density polyethylene (HDPE) project.

The deals are not inherently negative but could be net present value destructive, according to an investment banking source, agreed as they were at the bottom of the cycle.

It remains to be seen once Sasol has moved past the current trials what impact the truncation of its international reach will have on performance, but oversupply continues to dog polymers markets, and the loss of a portion of that capacity is unlikely to be as damaging as it could have been at other points in the cycle.

Sasol has also agreed to sell the world’s largest oxygen production plant, based in Secunda, South Africa, to Air Liquide. That will help raise the efficiency of the plant and lead to further CO2 emission reductions.

Sasol has already agreed the sale of a 51% stake in its explosives business to Enaex and an interest in the Escravos gas to liquids project to Chevron, and is in talks regarding Mozambique pipe joint venture ROMPCO and in power station CTRG.

The company is looking to raise around $6bn by the end of its fiscal year 2021 – the end of June 2021 – through a mix of cash savings, an expanded asset sale programme and a sale of new shares to existing investors.

THERE IS A PLAN BUT WOES MOUNT
Sasol’s management has done well to draw up and execute a plan to deal with such unprecedented disruption, but company leverage remains above the level required to maintain its current junk rating, according to Moody’s vice president Rehan Akbar.

Moody’s downgraded the company to Ba1, below investment grade, in March 2020 and subsequently slashed the rating further to Ba2 with a negative outlook.

“We have to recognise that it's a very challenging time, they probably deserve some credit for making a plan and executing on it. At the same time I think there is more work to do because the leverage is still relatively high for where we think a Ba2 rating is and that's why the outlook is negative,” Akbar said, speaking after the Lake Charles stake sale but before the Gemini sale.

“When you look at ethylene derivatives there are still a lot of supply/demand imbalance concerns, oil prices are still fragile, and I don't think anyone is expecting a very strong uptick in oil prices next year either,” he said.

“The outlook over the next 12-18 months is uncertain, the macro picture is also uncertain, so that is why we have rested on negative outlook because there is still material debt on the balance sheet and it does weigh on the rating,” Akbar added.

Grobler has used the company’s current straits as a reason to rebuff calls by some shareholders for more of a say and greater transparency in the company’s sustainability objectives.

Shareholders Just Share NPC and RAITH Foundation co-filed a resolution for consideration at the 20 November AGM for management  to outline Sasol’s Paris Agreement targets and how executive pay would be tied to them. Sasol had no legal requirement to do so.

“We need to run a successful business that generates strong cash flows. Without these… we will not have the funds to invest in green technologies that are required,” Grobler said.

“This is the balancing act the company must live with. I understand the impatience. We at Sasol would also like to move faster – but we have to move in a judicious and responsible manner. Too fast or too slow – both these approaches involve risks we must avoid,” he added.

Insight by Tom Brown

Additional reporting by Nigel Davis