LEANER OPERATION
South Africa's Sasol loses over $5bn, eyes painful restructuring
Posted on Thursday, 20 August 2020 12:11
Sasol is struggling from debt and poor choices. Shutterstock
In the past few months, group CEO and president Fleetwood Grobler and his team have "navigated volatility I have not seen in over 30 years at Sasol".
This is reflected in Sasol's dismal results for the financial year which ended on 30 June 2020. The listed company has declared a R91.3bn loss.
"Our financial performance is a reflection of the significant disruption from macroeconomic headwinds, particularly in the second half of the year," says Grobler.
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Containment efforts have necessitated "enormous commitment from Team Sasol. I would like to recognise the exceptional effort of our people through this most challenging period," he said.
"This financial year was our peak gearing period as we approached the near completion of the LCCP [Louisiana Chemical Complex Project]. … The onset of the pandemic placed greater pressure on our balance sheet," according to the Sasol CEO.
"These external shocks impacted Sasol dramatically, requiring us to act swiftly to stabilise the business in the short term through decisive action," explains Grobler.
In the financial year under review:
Sasol recorded impairments of almost R112bn.
Headline earnings per share plunged more than 100% to an R11,79 loss.
"We continue to face significant challenges as a business," concedes CFO Paul Victor.
Seeking balance
The dramatic developments have elicited an equally drastic response from the company. Sasol has set up a cash war room to monitor liquidity. In addition, the company's expanded and accelerated asset disposal programme continues to gather pace. Furthermore, a rights issue is in the pipeline.
Most important, the company is hitting the organisational reset button to create a leaner and more nimble operation. The ultimate goal is to raise $6bn to repay debt in the 2021 financial year and protect the company's highly geared balance sheet.
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"To create flexibility in our balance sheet, we have successfully engaged our lenders to waive our covenants at year-end, as well as lift the December 2020 covenant. Protecting our balance sheet and meeting our debt covenants remains paramount," says Victor.
Grobler explains: "The pathway to a deleveraged balance sheet is on track, underpinned by the progress made on our self-help initiatives and our asset divestment programme."
The company has managed to conserve $1bn in cash. It has a $2.5bn liquidity buffer. Milestones in the asset disposal programme include:
Exclusive negotiations with Air Liquide for the sale of 16 air separation units in Secunda. "We hope to have the final terms of that transaction agreed soon," notes Grobler.
The transaction to sell a 51% share in the explosives business to Enaex has been concluded. "I am pleased to confirm all jobs have been retained," says Grobler.
Sasol has entered into an agreement with Chevron to sell the company's indirect beneficial interest in the Escravos gas-to-liquids plant in Nigeria. "A key decision was made to stop all oil-based opportunities in West Africa."
Partnering discussions at Sasol's US-based chemical assets are advanced. "The final major step on our deleveraging pathway is a rights issue," says Grobler. Sasol is preparing the $2bn rights issue for 2021.
"The coming months will be tough for Team Sasol. A process of renewal does not come without difficult decisions," admits the CEO.
In November 2020, Sasol will inform investors about its organisational reset. This partly involves simplifying processes. Simplicity means the respective businesses will be empowered to make their own decisions, says the CEO.
This is important because Grobler took over in the aftermath of a board-instituted review of the LCCP. This resulted in the company parting ways with its joint CEOs to "restore trust". The review found, among other shortcomings, "a culture of excess deference".
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"We reviewed and updated our strategy to bring focus to two distinct and core businesses: chemicals and energy, where we have strong market positions and capabilities," says Grobler.
Sasol aims to transform its chemicals portfolio towards speciality chemicals. The base chemicals portfolio will remain a focus, especially for the South African integrated value chain.
Overall capital allocation in chemicals will be biased towards speciality chemicals. The energy portfolio will consist of the entire Southern African value chain.
In addition to the halt of all oil-based opportunities in West Africa, Sasol will resize its upstream portfolio to focus on gas in Southern Africa. No new investment in coal reserves will be made, in line with the company's plans to reduce carbon emissions.
"We will continue to focus on gas as a key complementary feedstock and progress growth of a Southern African gas delivery system – as well as renewables as a secondary energy source," according to Grobler.
"Our capital allocation principles will remain intact to support the implementation of this strategy. Mitigating our climate risk is a cornerstone of our strategy," assures Grobler.
Sasol is developing two 10 megawatt (MW) solar facilities for its South African operations as a first step towards realising at least its goal of 600MW of renewal power by 2030.
In terms of the organisational reset, "the optimisation of structures commenced in June and will continue in a phased approach, starting with senior leadership this month. Consultations with the relevant stakeholders are in progress," says Grobler.