Did Sasol sell its potential for growth?
Lake Charles meant to be basis of chemicals multinational group
Sasol, which flirted with disaster in March last year when its share price went into freefall amid a global oil price collapse and concerns about spiralling debt, is back in calmer waters.
Not only is a rights issue, which would bring with it dilution for existing shareholders, finally off the table, but the group reported this week that in the six months to endDecember its earnings before interest, tax, depreciation and amortisation (ebitda) declined 6%, a relatively strong performance given the headwinds the group has faced.
It has also slashed its debt by R64bn to a more manageable but still hefty R126bn.
And the market seems to approve, with Sasol’s share price having recovered from a low of R20.77 in March last year to R188.43 on Friday.
But the group’s resuscitation — which involved some difficult decisions on asset sales including parting with 50% of its base chemicals unit at the Lake Charles Chemicals Project (LCCP) in the US and cost-cutting measures — has come at a price. And the question is whether it has sold its future growth potential.
The LCCP always represented the main thrust of the group’s future plan for growth. The project, which ultimately cost $12.9bn due to major cost overruns that led to the exit of joint CEOs Stephen Cornell and Bongani Nqwababa in 2019, was supposed to transform it into a multinational chemicals group.
But the disposal of 50% of the Lake Charles base chemicals business to LyondellBasell Industries for $2bn (about R29bn) now seems relatively cheap because of the recovery of oil and chemical prices.
The sale also means that Sasol will have to share future profits.
“They say hindsight is always a perfect science but given the recovery we’ve seen in oil and chemical prices, I think the $2bn sale of the base chemicals unit at Lake Charles was probably not the best decision,” said Kagiso Asset Management portfolio manager Abdul Davids.
Davids noted that the deal with LyondellBasell Industries was “struck late last year when commodity prices were still very weak”.
He said not only had Sasol delivered a better performance itself in the six months ended December, but the average price of crude oil in that period was just over $40, double what it was in March last year when Sasol announced drastic measures to generate $6bn in additional cash through cost savings, asset disposals and a possible rights issue to steady the ship.
Davids said profit should be “even stronger” in the second half of the financial year with the oil price moving “closer to $60”, which makes the sale of the stake in LCCP more difficult to swallow.
“If you look at LCCP they will argue that they only sold base chemicals and that they still have the performance [speciality] chemicals business. But the reality is the two are interlinked and LyondellBasell is now operating the plant and selling through their network.
“Sasol has given up more than just a 50% stake in base chemicals, they’ve given up direct access to market, they’ve given up any potential of synergy between base chemicals [which include polymers and solvents] and performance chemicals [which include alcohols and surfactants used in household detergents and hygiene and personal care products].”
However, Sasol CEO Fleetwood Grobler disagrees, saying in an interview after the release of the results that apart from ethylene, there was “nothing else that could provide for synergies” between base and speciality chemicals units.
Grobler said the idea for a possible partner at Lake Charles dates back to 2017, when Sasol had been “very open and honest” at its capital markets day in saying it would never again do a project of this size on its own. He said the group told the market that it would “always think about partnerships, and secondly that in the future when we’ve got money to spend we would rather put it into speciality chemicals than commodity chemicals”.
“So our strategy was very clear at that time and that was in 2017, and it wasn’t something that popped up today. It was the intended strategy.”
He said the pandemic, the collapse in oil prices and a stressed balance sheet resulted in Sasol having to take that step earlier than intended.
“We had to do it last year in the interest of the company, to stabilise it and make sure the company could prosper from here onwards,” said Grobler.
Wade Napier, diversified resources analyst at Avior Capital, said Sasol had to sell assets when it did because it urgently needed to repair its balance sheet, but it was “done at possibly one of the worst possible times”.
“Have they sold their future? Possibly, but they didn’t have any other alternative. That’s the cold hard truth of it,” said Napier.
Adrian Hammond, mining analyst for SBG Securities, said Sasol management could have avoided the sale of 50% of the base chemicals unit at Lake Charles if it had approached shareholders in 2019 with a view to offering a rights issue when the share price was still relatively strong instead of taking on even more debt.
“They actually should have done the rights issue a long time ago and they would have retained full ownership of Lake Charles and the upside would have now been coming to the shareholders.
“But they walked down that risky road that they shouldn’t have, with the expectation that things will improve in terms of the macro picture,” said Hammond.
“If they had done a rights issue at a much higher share price they wouldn’t have had to sell the crown jewels. It’s like when the stock market crashes and you sell at the bottom. Fortunately, they have not sold all the upside and now the macro [environment] may bail them out,” he said.
But though the timing of the sale had not been ideal, Grobler said the group conducted a “competitive bidding process” and had found “strong contenders globally that bid for the asset”.
“At the end that was the value that we believe was the fair value out of a strong competitive bidding process. You can argue that yes, it was at the lower end of the cycle, which reflected that.
“But then it was also at a time when Sasol as a company needed this the most, so you have to balance those two.
“We specifically only considered 50% because we knew that should there be a recovery, we could then participate in the upside of that cycle. And that is exactly what we are doing.”
Grobler said Sasol had to strike a “balance between saving the company and keeping upside in the long term to still get value from that asset”.
“Take into consideration that all our speciality chemical assets are 100% still retained in a world-class asset that we will still get the benefits from as we originally intended,” said Grobler.
Looking further back, Napier said one solution for Sasol could have been for the group to have thought about taking on a partner at Lake Charles seven years ago at potentially more attractive prices.
But for Davids, the first prize for Sasol would have been not to have the need for a partner at Lake Charles. He said Sasol had been looking to its more environmentally friendly international operations as a way to reduce exposure to SA, where it has major challenges, not least the fact that its Secunda plant — although very profitable — is one of the largest carbon emitters in the world.
He said that to make that operation and the Sasolburg facility “green friendly” would be very difficult.
“Ideally, what they should have done is do a partnership with Secunda rather than LCCP. Maybe do a JV [joint venture] on their coal mines or even on the base chemicals at Sasolburg?”
But, according to Napier, finding a partner for Sasol’s South African operations would be extremely difficult.
Given the emissions, he said he does not know a single company that “would have looked at Secunda and said ‘it’s a good idea to partner there’ ”.
Referring to the July sale of Sasol’s 16 airseparation units at its Secunda operation to French group Air Liquide for R8.5bn, Grobler said the group was happy to partner with other companies in SA when it made sense, but that the group would not consider a partner at the actual Secunda plant.
Nevertheless, Sasol is in a better position financially now than it was six months or 12 months ago.
Napier said that “from that perspective, I would be more positive”.
“I think the results were strong, and you really did see the benefits of their cost-savings programmes coming through.
“You do have to recognise that with the oil price in rand terms declining 23% year on year, the fact that their ebitda only declined 6% year on year is a very commendable achievement.”
Hammond said that “from a macro perspective, it is looking a lot better” for Sasol with “free cash flow looking a lot healthier”.
However, he said the group is not “completely out of the woods” as it still holds a lot of dollar-denominated debt.
Disposal of 50% of base chemicals business for $2bn now seems cheap