Sasol CEO forecasts Lake Charles deal with partner soon
Strong international interest in troubled US chemicals project
● There has been strong international interest in Sasol’s base chemical units at its Lake Charles Project in the US, with CEO Fleetwood Grobler saying the synfuels and chemicals giant may make an announcement about a partnership within weeks rather than months.
Grobler said in an interview this week the interest in the base chemicals units was “because people know this is a world-class state-of-the-art facility”.
“We are now busy in very detailed, sensitive commercial discussions. We are making very good progress in terms of the partnering concept. The deal construct and who the parties are, and what it is and what it is not, of course I can’t divulge.
“Once we are at the end of that, which I think is not months away, probably weeks away, then we will come to market and give that context.”
Grobler said the group was only considering a potential partner for its base chemical assets at the US project as Sasol’s core strategy remained focused on speciality chemicals, and none of the speciality chemicals units at Lake Charles would be affected by a partnership.
Base chemicals include polymers and solvents. Speciality chemicals, such as alcohols and surfactants, are used in household detergents and hygiene and personal care products.
Sasol may have posted a loss of R91.3bn for the year to end-June, but analysts say there are some green shoots indicating the worst may be behind it.
Even so, the company, whose market capitalisation of about R90bn is smaller than its loss, and which is writing down its chemicals and energy assets by more than R100bn, does face some difficult months ahead.
Its balance sheet is still under pressure and it will arrange a rights issue of possibly up to $2bn (R34.6bn) in the second half of the 2021 financial year.
It will also implement cost cutting and sell assets to help reduce its enormous debt by $6bn.
Its total debt as of June 30 was R189.7bn, compared to R130.9bn at the same time last year.
Operationally, though, the group has remained resilient and Lake Charles — which has swallowed billions due to cost and schedule overruns — is expected to start making a positive contribution to Sasol’s bottom line.
Dumisani Ndlovu, equity analyst at All Weather Capital, said given the Covid-19 disruption, Sasol’s results were “operationally strong”, with Sasol having “demonstrated far more stability in operating their assets than one would have thought under Covid-19”. Ndlovu said that though Sasol’s balance sheet was worse than expected, the group’s decision to go the route of a rights issue along with asset sales offered it an “opportunity to reset the capital base”.
Wayne McCurrie, portfolio manager at FNB, said the outlook for Sasol was better. “They have sold quite a few assets, they’ve generated massive cash flow, some R40bnodd this last year, under very difficult circumstances, without Lake Charles actually contributing anything.”
He added that Sasol’s decision to pursue a rights issue was a sensible approach. Opting not to hold a rights issue would have been risky, as it then would have had to rely on the rand weakening and the oil price maintaining its current levels or strengthening.
“We don’t know what the oil price and the rand are going to do, there is too much risk here and they can do a relatively small rights issue of $1bn — which in the bigger scheme of things for Sasol is relatively small — and which won’t give you too much dilution on the share price,” said McCurrie.
One factor in Sasol’s favour was that the oil price had recovered to about $45 a barrel from $20 in March, meaning the massive pressure it faced a couple of months ago had “somewhat diminished”.
“It’s also not looking too bad here on the current rand oil price and they [Sasol] have cut their stock levels down enormously and they’ve cut expenses,” McCurrie said.
Wade Napier, diversified resources analyst at Avior Capital, said Sasol’s “underlying performance is not too bad and maybe a bit better than I was expecting” but the balance sheet “looks a lot worse than what I was expecting”.
“The rights issue is now a foregone conclusion. It’s really a case of if they are trying to reduce debt by $6bn, how do you map that out? What will comprise that $6bn?
“How much is going to be free cash flow, how much is going to be derived from asset sales and how much from the rights issue?”
Napier said Lake Charles was now mostly operational, with Sasol just waiting for one unit still to ramp up.
“It [Lake Charles] should start generating positive ebitda [earnings before interest, tax, depreciation and amortisation] in the second half of the year.”
Grobler said he could not speculate on the size of the rights issue, but that it would be “the right one we need for a $45 oil world” after Sasol had used all the self-help measures at its disposal, such as cost cutting and asset sales, to ensure the capital raise was the lowest possible value.