EDITORIAL: Sasol rises into blue skies

The good news just keeps coming for shareholders in Sasol, the petrochemical giant that was teetering on the verge of collapse less than a year ago.

On Monday, the company said plans to tap shareholders for about R30bn have been scrapped, giving stockholders the biggest reason yet to throw a party as the company has raised enough money through self-help measures that include a punishing cost-cutting programme and the sale of assets.

Sasol, which counts the Public Investment Corporation (PIC), the custodian of R2-trillion in government employee pensions, among its major shareholders, outlined the survival plan in June 2020, prioritising the paying down of nearly R190bn in net debt racked up in an ill-fated expansion in the US.

The company’s borrowings were dangerously high as a proportion of its core earnings, or earnings before interest, tax, depreciation and amortisation (ebitda), but manageable until oil cartel members Saudi Arabia and Russia started a price war earlier in 2020 and restrictions to curb the Covid-19 pandemic brought whole industries to a grinding halt.

Even as global prices staged a recovery, ending the year at more than $50 a barrel after US crude plunged into negative territory and Brent slumped below $20 earlier in 2020, the jury is still out about whether prices will rebound to pre-pandemic levels.  

For Sasol, which sells fuel made from coal and gas on the same regulated prices as companies that import and refine crude, the good news is that there is growing consensus that prices will remain above $50 a barrel in the short term, enough for it to squeeze profits but insufficient to keep the proportion of its debt to core earnings ratio at agreed levels with creditors.

As such, CEO Fleetwood Grobler, brought in to clean up costly operational blunders by two former joint bosses, Stephen Cornell and Bongani Nqwababa, who were unceremoniously shoved towards the door in 2019,  needed to come up with a plan to not only ensure that the company can survive a low-oil-price environment but can also quickly come up with creative ideas to break free from debt.

Aside from making sure that long-suffering shareholders are spared the pain of bailing out their company, Grobler was under pressure from lenders who agreed to waive compliance with loan agreements for the 2020 financial year in return for the company using the breathing space to embark on one of the country’s biggest corporate fundraising efforts.

In August, Sasol sold 16 air separation units that supply oxygen and nitrogen to the Secunda plant, netting it R8.5bn. That was followed months later by the disposal of a 50% stake in its Lake Charles chemical plant for the equivalent of R33bn and another sale of a US polythene business, Gemini, for just over R6.2bn.   

The result from the company’s fundraising effort, which includes operational cost cuts worth $2bn, is that it helped it slash its debt burden to R126bn from nearly R190bn, putting its net debt to ebitda ratio — a measure used by lenders to work out how well a company’s earnings cover its debt — at 2.6 times, substantially below the agreed level of four times.

That was enough for the company to call off the rights issue, which would have diluted investors’ current shareholding. It is welcome relief for shareholders, who painfully witnessed an astonishing destruction of value over the last few years. At its peak, Sasol shares were worth more than R500 each.

Though the stock hardly moved on Monday, it has been on a supersonic rally from the low suffered in March, surging more than sevenfold to over R200 a share in reflection of investor bets that Grobler and his team were doing enough to avert the share sale.    

Even as Sasol looks to be on track to reclaiming its glory as an investor darling, concern over climate change demands the same zeal shown in fixing its lopsided capital structure. The company has a big job ahead if it is to be reinvented to thrive in a world that increasingly frowns upon companies that burn fossil fuels for energy.