Chemicals and energy group Sasol has announced that an asset-review process is under way that could result in the sale, closure or growth of certain assets. However, the JSE-listed company has also stressed that there will be no “fire sale”.
Joint president and CEO Bongani Nqwababa reports that the review is being conducted “against stringent financial metrics” with the objective of improving the company’s return on invested capital.
The review follows on from a cash and capital conservation drive initiated in 2015 in response to the decline in the oil price, which are anticipated to result in sustainable cash-cost savings of R8.4-billion and have shaved R69-billion off its previous capital budgets.
Despite these saving and a strong operational performance in 2017, which saw its synfuels operations in Secunda producing at record levels, Sasol reported a 15% decline in headline earnings a share of R35.15 in the year to June 30.
The decline was attributed to a stronger rand during the year, which traded at an average rate of R13.61 to the US dollar, compared with R14.52 in 2016. For every 10c move in the value of the rand against the US dollar, Sasol earnings move by between R7-million and R10-million.
Joint president and CEO Stephen Cornell reports that the cost-saving initiatives have positioned the company to operate profitably in a $40/bl oil-price environment, but that attention is turning to “continuous improvement” programmes, incorporating the asset review.
Nqwababa tells Engineering News Online that the review involves an assessment of how best to optimise its current portfolio of assets to ensure a higher sustainable return. “One of the biggest criticisms we get from the market is that our capital allocation could be much better. So we are responding not only to what the analysts and shareholders are saying, but also to what we believe we could do much better.”
The review will make an assessment of which assets could be expanded or improved, but will also identify those from which the group should exit.
“What [the review] is not, is a fire sale,” Nqwababa stresses, noting that Sasol has no liquidity problem, with a cash balance of just over R80-billion.
FUTURE STRATEGY SENSITIVE TO RISE OF EV
In parallel, Sasol is also in the process of refining its long-term strategy, which is to be formally unveiled in November.
However, Nqwababa confirms with Engineering News Online that the new strategy will be alive to current fuel-market developments, including the anticipated rise of the electric vehicle (EV). Recent research published by Bloomberg New Energy Finance forecasts that EVs may account for 54% of all new light-duty vehicle sales globally by 2040.
Besides the anticipated growth in EVs, the strategy will also take account of the gradual global move away from diesel, especially in Europe, as well as increased energy efficiency.
Nqwababa stresses that Sasol does into want to either over- or underestimate the impact of EVs, which, he stresses, currently only make up 0.6% of the global vehicle fleet. “I’m not trivialising the future impact, but just like any technology, it’s always overestimated in the early years and underestimated in the long term.”
Sasol’s view is that the combination of EVs and energy efficiency will “squeeze” refining margins, but it is not yet anticipating a dramatic take-off in EVs in the South African market.
On the chemicals end of the business, the group still expects growth to be tied strongly to global gross domestic product, which Sasol expects will expand by between 3.5% and 4%.
“Over time, we expect to see the earnings to be 50% from South Africa and 50% from our global operations . . . with chemicals being up to 60% of our earnings.”
For 2018, however, Sasol is forecasting continued currency volatility, subdued fuel demand in Southern Africa and growth in chemicals sales of between 3% and 5%.
It has also taken out hedges on both crude oil and the currency in a bid to manage the anticipated volatility amid ongoing high capital expenditure at its Lake Charles Chemicals Project (LCCP), in the US.
Sasol has revised its long-term internal rate of return at LCCP to between 7% and 8%, from over 8% previously and expects to begin production from the first unit of the ethane cracker in the second half of 2018.