Sasol faced severe headwinds when the Covid-19 pandemic hit, with low oil prices threatening its business model, ballooning debt from cost overruns at its Lake Charles chemicals project in Louisiana and severe weather delaying the project even further.
So severe were Sasol’s challenges that many investors questioned its sustainability and ability to service its debt. Its Net Debt / EBITDA ratio for 2020 was 4.3 times, well above its covenant with its debtors of 3.0 times.
Rating agencies S&P Global Ratings and Moody’s downgraded Sasol to non-investment grade, and investors dumped the stock, with the share price reaching a low of under R30.
Sasol CEO Fleetwood Grobler and his executive team responded to this crisis with a transformation programme called Sasol 2.0.
Grobler said their focus with Sasol 2.0 was to find a way to take the cash breakeven price for the business from US$35-45 per barrel to US$30-35 per barrel.
“We introduced Sasol 2.0 to make the business competitive, highly cash generative, and able to deliver attractive returns, even in a low oil price environment,” he said.
As part of its Sasol 2.0 strategy, the business was simplified into two business units – Sasol Energy and Sasol Chemicals.
Sasol sold assets that do not align with its core business strategy, which it said would net $3 billion and help to reduce debt.
The total asset divestments announced in 2021 will net $3.8 billion and the company’s response plan achieved $2.1 billion of cash savings, reducing its net debt to $5.9 billion and bringing its Net Debt / EBITDA ratio back down below their covenant to 1.5 times.
Sasol’s energy business is focused almost exclusively on Southern Africa, except for a joint venture with Qatar Petroleum in the ORYX gas-to-liquids plant in which it owns 49%.
Sasol owns 63% of the Natref oil refinery in Sasolburg, a joint venture with Total. Sasol is responsible for managing operations at the refinery.
The business’ other energy products are all produced at Sasol’s facilities in Secunda and Sasolburg.
Coal is sourced from mines around Secunda, and natural gas comes from Pande-Temane in Mozambique. It transports the gas using the ROMPCO pipeline, in which it has a 20% stake.
Sasol supplies approximately 40% of South Africa’s domestic fuel.
Chemicals Africa operates from the same Sasol plants as the energy division in Sasolburg and Secunda. It also has a wax facility in Durban.
The new Lake Charles Chemical Plant (LCCP) in Louisiana is the biggest investment in their chemicals business.
The LCCP investment shows a key strategic focus on differentiated specialty chemicals with higher profit margins than Sasol’s commoditised base chemicals.
Sasol claims the broadest portfolio of integrated alcohols and surfactants and has a unique offering with their Ziegler and Guerbet alcohols.
Interestingly, when measured by land size, the Lake Charles plant is smaller than Sasol’s Secunda plant – six square kilometres versus eight square kilometres.
Money and people
Chemicals America only contributes 13% to Sasol’s turnover but accounts for 37% of the asset value.
It is because LCCP is a new asset, and while it is fully commissioned, it is still in a commercial ramp-up phase to increase production to its full potential.
That, coupled with the low number of employees needed to operate the plant, means there is potential for high profit margins at Lake Charles.
Chemicals Eurasia contributes a small proportion to the company’s assets, employees, and turnover.
However, the contribution to turnover is around double the contribution to employees and assets. It shows the highly profitable nature of the chemicals business.
While the Lake Charles project contributes significantly to Sasol’s geographic and market diversification, the company remains highly concentrated in South Africa.
The combined fuels, Chemicals Africa and mining segments contribute 62% to Sasol’s turnover.
Given that 2021 was not profitable for the fuels business because of Covid lockdowns, it shows how highly cash generative the South African operations are.
Sasol’s South African operations account for 26% of total assets and 42% of employees (excluding mining).
Mining comprises only 10% of total assets, but contributes 27% to Sasol’s employees, showing the labour-intensive nature of these operations.
While mining contributes 10% to total turnover, if you ignore the intersegmental turnover within Sasol, mining only contributes 1% to total revenue from coal exports.
It shows the integrated nature of the value chain between business segments in Sasol’s South African operations.
The assets Sasol sold
Over the last three years, Sasol sold numerous assets that do not fit into the Sasol 2.0 strategy.
The table below provides a snapshot of the transactions, with the reported profit or loss from the sale.
|50% LCCP Base Chemicals||LyondellBasell||R29.9 billion||(R1.1 billion)|
|Secunda Air Separation Units||AirLiquide||R8 billion||R2.7 billion|
|50% Gemini HDPE (full disposal)||INEOS||R3.5 billion||R680 million|
|Minority Gabon Oil Assets (full disposal)||Vaalco & Perenco||R420 million||R145 million|
|51% Secunda Explosives Business||Enaex Africa||R990 million||(R46 million)|
|26% of 49% minority in Enaex Africa||Afris Subco||R175 million||(R115 million)|
|50% Stake in Sasol Huntsman GmbH & co KG (full disposal)||Huntsman Corporation||R1.5 billion||R936 million|
|50% Stake in Sasol Wilmar Alcohol Industries (full disposal)||Wilmar||R235 million||R47 million|
|Indirect interest in EGTL Plant – Escravos, Nigeria||Chevron||R875 million||R705 million|
|Heat Transfer Fuels (HTF) business in Marl||Uncertain||R270 million||Uncertain|
|Transactions still in progress end FY21|
|30% of 50% stake in ROMPCO Mozambique pipeline||iGas & CMG||R4.1 billion||Uncertain|
|49% Stake in Central Térmica de Ressano Garcia (CTRG) (full disposal)||Azura Power||Uncertain||Uncertain|