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Sasol takes hard decisions for new strategy

Nov 23 2017 08:17
Lameez Omarjee


Company Data

Sasol Limited [JSE:SOL]

Last traded 37
Change 5
% Change 17
Cumulative volume 8806691
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg – Energy and chemicals company Sasol [JSE: SOL] is introducing a new strategy for 2018 and beyond, but it comes with hard decisions as the company cuts loose certain areas of its portfolio.

Speaking at a briefing at Sasol’s head office in Sandton on Wednesday, joint presidents and chief executive officers Bongani Nqwababa and Stephen Cornell, as well as chief financial officer Paul Victor, unpacked the group’s new strategy.

The strategy is a three-pronged approach. The first is to extract value from its existing foundational business to remain competitive; this involves a review of its assets.

Secondly, the group will take an approach to achieve value-based growth by focusing efforts to grow its specialty chemicals business globally, continue exploration and production in Mozambique and West Africa and grow its retail fuels footprint in Southern Africa.

Finally, the group will implement disciplined capital allocation, which means that it will no longer be investing further in greenfields gas-to-liquids (GTL) projects, crude oil refining capacity, commodity chemicals and renewables, explained Nqwababa.

Asset review process

Nqwababa explained that the asset review is necessary to reclassify assets according to the group’s growth ambitions. “The review process is not simply intended to improve our balance sheet. Our intent is to improve the performance of our assets,” he said.

“A total of 100 assets are being evaluated against an agreed criteria and potential classifications.”

So far, more than 50% of asset reviews have been completed, and the majority of assets are to be retained and improvements are to be applied.

Specifically, the group’s Canadian shale gas asset has been identified for disposal as it was meant for GTL which is no longer a growth focus area of the group. A structured divestment with Sasol’s partner Progress Energy is to take place. The remainder of the asset reviews will take place in 2018, said Nqwababa.

“We are in a good place to have a long list of assets we want to keep,” said Victor. Details of other assets which are to be disposed will be announced in due time as there is still engagement between parties and there are sensitivities such as the impact on employees to consider, said Victor.

Rebalancing the portfolio

“Hard choices had to be made to rebalance the portfolio,” said Cornell. The decision to stop investing in GTL, a growth focus area in the past, means that the group will no longer pursue its GTL project in the US.

“While our current GTL assets are generating good returns and cash flows, the value proposition for Sasol to build new GTL projects is uneconomic against a volatile external environment and a structural shift to a low oil price environment,” said Cornell.

When asked if a change in the oil price outlook would encourage investment in GTL in the future, Nqwababa told Fin24 that based on scenario planning for oil price at $50 per barrel, $60 bbl and $70 bbl, GTL is still not viable. “There has been a structural change in the oil sector,” he said.

The group’s investment in specialty chemicals, exploration and production and retail fuel is expected to remain “robust” even in a low oil price environment of $50 bbl, said Nqwababa.

The group’s decision not to invest in additional crude refining capacity came about as it does not provide a clear competitive advantage for Sasol, given the large investments required to meet fuel specifications, Cornell explained.

Regarding commodity or base chemicals, Cornell explained that the risk profile to execute such large projects are larger than what the group plans to take on in the future.  

Sasol also does not see itself developing a “meaningful position” in the renewable space. But Nqwababa assured that developments in renewables technology will be monitored and would be appropriately deployed if there is value for Sasol to enhance its environmental footprint and lower emissions.

Value for shareholders

This new strategy will enable Sasol to take a more balanced approach to growth through investment in projects, but also deliver value to shareholders more quickly through its dividend cycle, explained Victor.

The group is expected to hit the peak of its gearing in 2018, once the Lake Charles Chemicals Project (LCCP) comes online in the second half of the year, said Victor.  “Once Lake Charles comes online there will be sufficient cashflows coming onto the balance sheet, to deleverage and give flexibility to execute the strategy.”

Through scenario modelling of different oil prices, the group is able to get an indication of how much capital is available for reinvestment and to pay out to shareholders. At a base case of $60 bbl, the group plans to allocate between $20bn to $25bn of capital for reinvestment and the rest to go to shareholders, he explained.

Victor emphasised that the group is committed to be disciplined in the allocation of capital. The gearing is to be limited to a range of 20% and 40%.

Based on the same scenario modelling the group aims to deliver return on invested capital (ROIC) of 12%, a growth rate of 5% in earnings before interest and taxation (EBIT) and dividend payouts for shareholders are expected to grow from 36% to 40% by 2022 and thereafter 45%, explained Victor.

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