A new game plan for Sasol
Mega-projects to be binned as the firm cuts gas-to-liquid investment, but plenty of other growth options remain
Sasol’s decision to invest no more money in either new gas-to-liquids (GTL) plants or plant expansions closes the door on several mega-projects that were being studied in Mozambique, Canada and the US.
Sasol will retain its stake in the Oryx GTL plant in Qatar and its 10% in Escravos GTL in Nigeria. But it will not proceed with the second, US$15bn investment in a GTL project at Lake Charles, Louisiana. It will sell the shale gas assets in the Montney Basin in Canada that were going to provide the feedstock for a GTL plant. In Mozambique, it began a feasibility study into a GTL plant about three years ago but will no longer proceed to an investment decision.
Joint president and CEO Stephen Cornell says existing GTL operations are generating good cash flows. Sasol will optimise its leading position in Fischer-Tropsch technology (the process that turns carbon monoxide and hydrogen into synthetic fuels). But volatile gas and oil prices do not support further investments in these plants.
Abdul Davids, head of research at Kagiso Asset Management, welcomes the decision. He says that in GTL, gas feedstock is multiplied 16 times to get the fuel equivalent. That means at a gas price of $4/million British thermal units an oil price of at least $64/barrel is needed. Recently, the oil price has remained below $64/bbl for extended periods.
A large-scale GTL plant costs at least $10bn to build, Davids says. Kagiso has always argued that the economics of GTL do not make sense in a world in which the oil price cannot be guaranteed and the long-term outlook for diesel is under threat.
The decision about GTL is one of several that Sasol’s management has taken after a comprehensive review of its strategy for 2018-2030. CFO Paul Victor says no more mega-projects will be undertaken in the short term, as Sasol has learnt that these take a long time to deliver returns to shareholders.
He says this does not mean Sasol is now "ex growth", but its shareholders have indicated they want a greater balance between dividends and growth. Though its dividend yield in rand is relatively high at 2.96%, for global investors this can be eroded by rand depreciation.
In future, Sasol will build up its portf olio of projects worth $500m-$1bn with shorter cash cycles and complete them before considering larger projects of $1bn or more, where partnerships will be a key aspect to reduce risk.
Sasol does not plan to invest more than 10% of its market capitalisation in a single year in growth projects, which is the norm in this industry, Victor says.
Davids says Sasol’s large capital allocation decisions on projects such as Qatar GTL, the Lake Charles project and GTL in Nigeria were an issue for shareholders, who were fearful another mega-project would overextend the balance sheet.
"It is a positive surprise that it intends to spend a maximum of 10% of market capitalisation on projects and it de-risks the investment case," Davids says.
Based on an assumed oil price of about $60/bbl, Sasol expects it will have about $20bn-$25bn available for capital projects between 2022 and 2030. It will target growth in areas in which it is already active: high-value speciality chemicals, exploration and production in Mozambique and West Africa, and fuel retailing in SA.
Cornell says these areas were identified because Sasol believes the growing global population will mean an increased demand for chemicals and energy. There will be increased pressure to reduce carbon dioxide emissions, but fossil fuels will remain a dominant energy source beyond 2030.
Jon Harris, executive vice-president of upstream at Sasol, says the company will continue to invest in Mozambique, both in its existing licence areas and through applying for new acreage. In West Africa, where it has a 27.75% stake in the Etame field in Gabon, its return on invested capital has exceeded 40%.
It has developed intelligence and relationships in West Africa, which it will use to grow its presence.
Maurice Radebe, Sasol’s vice-president of the energy business, says the company will consider gas-to-power and developing gas markets in southern Africa. It has 400 retail outlets in SA and is growing at about 11%/year, faster than the rest of the sector.
It likes the margins in the sector and intends to grow organically. While Sasol intends to retain its stake in the Natref refinery, it will not increase refining capacity.
At the same time that Sasol was delivering an investor-friendly message, the shares were pulled down by the strengthening rand/dollar exchange rate. They shed about R12, or 3%, in two days to R424.