EDITORIAL: Relieved Sasol shareholders give sale thumbs up
Last week’s announcement by Sasol that it had struck a deal with French company Air Liquide was a rare piece of good news for shareholders in recent months.
The sale of the 16 air separation units, which supply oxygen and nitrogen to Sasol’s synthetic fuels and chemicals manufacturing process at its giant Secunda plant, will net the company R8.5bn in cash.
That will go some way in fixing its lopsided capital structure, but crucially it has triggered talk that Sasol might be persuaded into scrapping a plan to tap shareholders for about $2bn (R34bn) as part of an operational overhaul that may include raising the equivalent of R100bn to bring down its debilitating debt.
Sasol’s net debt has peaked at R121bn, which was dangerously high as a proportion of its earnings before interest, taxes, depreciation and amortisation (ebitda), or core earnings, but manageable until oil cartel members Saudi Arabia and Russia started a price war earlier in 2020 and the Covid-19 pandemic brought whole industries to a grinding halt.
Whether oil prices will recover to pre-Covid levels will depend on dozens of hard-to-predict moving parts, but in the short term there’s a growing consensus among analysts that prices will remain at about $45 a barrel, enough for Sasol to squeeze profits but insufficient to keep the proportion of its debt to core earnings ratio at agreed levels with creditors.
CEO Fleetwood Grobler hence reached out to lenders, successfully asking for the agreement to be waived for the year to end-June and getting them to raise the ceiling for the six months to end-December on condition that the company prioritise debt reduction.
With the ball in Grobler’s court after the deal with creditors, he needed to show that his coherently laid out plan to sharpen the company’s focus on its mainstay energy and chemical business and break it free from the shackles of debt is accompanied by swift execution.
If the share price is anything to go by, investors welcomed the Air Liquide deal, perhaps not for its commercial merits, but as a sign that they would not be called upon to inject cash through the issue of new shares. The stock booked its biggest one-day gain in nearly two months, rising more than 8%.
However, given that the money is about 8% of the total sum Sasol needs to raise, it might be wishful thinking on the part of investors, who are already out of pocket as a host of other companies delay or cancel dividends, that the transaction would persuade the company to call off the rights issue.
Furthermore, the price tag tells a disturbing story. Just five years ago, Air Liquide built the 17th air separation unit, stumping up €200m (about R3bn at the time) for Sasol to use. It is true the unit, which was commissioned in 2018, is newer and should therefore fetch a higher price than each of the 16 that have been offloaded. But for Air Liquide to snap up each for about R530m, or 82% less than what it cost to build a new one, implies that Sasol is in a desperate negotiating position that makes it harder to strike a commercially sensible deal.
And with oil companies worldwide under pressure to write down their assets to reflect weak demand for fuel as airlines remain largely grounded, it is hard to see how any buyer of the company’s stake in an oil refinery in Sasolburg or its West African oil assets would pitch a price that does not reflect gloomy long-term commodity price assumptions.
For shareholders, last week’s announcement, albeit with a sting in the tail, is a major step forward but it might not be enough to get them off the hook.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.