Sasol’s pro-active measures reassures market

A trading update and production figures for the nine months to end-March show that Sasol was holding its own as far as fuel and chemicals sales go, until just before the national lockdown.

It also listed several pro-active measures to limit the impact of the current economic environment which seemed to have given investors some comfort – the share price jumped 10% to above R65 in early morning trade.

It is difficult to believe that the share price dropped to below R22 a few weeks ago, but just as difficult to comprehend that the share nearly reached R600 just 18 months ago.

Detailed figures published on Sasol’s website show that production and sales volumes were largely unchanged from the comparable period a year ago, while management outlined measures to counter the effect of the Covid-19 pandemic on its employees and operations.

However, management warned that the lockdown in SA continues to have a significant impact on domestic fuel demand – roads are quiet – and Sasol decided to temporarily shut down production at its Natref refinery and reduce production at Secunda Synfuels by 25%. This was already announced in a previous trading update at the beginning of April.

According to the trading update, fuel demand is being closely monitored in light of the two-week extension of the lockdown in South Africa. “Sasol’s operations offer some flexibility to balance fuels and chemicals output to respond to product demand,” says the statement.

“Chemicals used in the mining and construction sectors have also seen a reduction in demand, which has necessitated the suspension of production of Sasol’s ammonia, nitric acid and chlor-vinyl plants in Sasolburg.

Market demand for Sasol’s other industrial chemicals has not been significantly impacted and therefore Secunda Synfuels is prioritising chemicals production for supply to domestic and export markets,” says management.

CEO Fleetwood Grobler has at several occasions in the last few months reiterated Sasol’s strategy of positioning itself to survive and prosper in “a low oil price environment” and related the necessary steps in several meetings with the investor community.

But, he probably never suspected that oil prices would turn negative and that producers would effectively pay downstream operators to accept crude oil, not that business world-wide would shut down large parts of their production capacity for a few weeks and even a few months.

As with other companies across all industries, the outlook for Sasol is dependent on the spread and impact of the pandemic on global economies. Sasol reported that it has successfully implemented steps announced to stakeholders (middle March) to counter the effects of the deteriorating business environment.

These measures included the optimising and reducing cash costs, re-prioritising of capital expenditure and stricter management of working capital. Management says most of the initiatives, such as reducing costs by negotiating with suppliers, freezing vacancies and reducing work performed by outside contractors, have already been agreed to and are being implemented.

“However,” says management, “savings relating to working capital carry some risk due to higher than expected inventory levels following reduced demand and the impact of a weaker exchange rate  on accounts receivable.”

Sasol announced more steps to negate the ongoing negative impacts caused by the coronavirus outbreak. “These measures are necessary to help protect the company’s balance sheet and liquidity until at least the end of the 2021 financial year,” according to the trading update.

Executives agreed to a reduction of 20% to 40% in directors’ fees, with top executives and senior management agreeing to a 20% reduction in salaries for a period of eight months. Middle and junior management will see their salaries reduced by 10% to 15%.

Fleetwood is leading the way, effectively donating one month’s worth of his salary to the Solidarity Fund in addition to the 20% reduction.

While these steps will save a few million rands – a calculation based on the remuneration report in the 2019 annual report suggests a saving of around R20 million in executive salaries – shareholders would be more interested in the fact that Sasol is using the downtime to do some maintenance work on its synfuels plants.

Management says Sasol is trying to do “critical and statutory work during the current period of lower demand at Secunda Synfuels, which could allow the maintenance intervention planned for September 2020 to be optimised significantly or even postponed”.

Sasol’s estimates for fuel and chemical sales for the full financial year indicate that things are not as bad as investors might as expected when they sold the share down to R22. The estimate for sales of liquid fuels shows a drop to between 50 and 51 million barrels compared to actual sales of around 55 million barrels in the 2019 financial year.

The sales volumes of both performance chemicals and base chemicals are expected to increase, by respectively 7% to 9% and 12% to 15%. However, Sasol noted that chemical prices are currently very volatile.

The coal mining division is producing according to schedule and coal above immediate needs are stockpiled that impacts on working capital, but ensure future supplies if production is interrupted. Coal purchases from external producers have been curtailed.

Management also reported to investors that Sasol has made progress on its expedited review of the business to reposition it for current and future low oil prices. It reported that the effort to dispose of assets has yielded good interest, despite the current uncertainty.

It says that these asset disposals remain essential to reduce debt levels, but that Sasol would be able to maintain sufficient liquidity within operations. The overall liquidity target was set at $1 billion, which management said previously would be enough as there are no significant debt repayable before middle next year.

For once, there was good news from the Lake Charles Chemical Project in the US. Construction work remained on schedule and is 99% complete while commissioning of all the different sections is progressing according to plan and even a bit faster than was originally anticipated.

However, Sasol says chemical prices showed further weakness. “Earnings before interest, tax, depreciation and amortisation (EBITDA) from LCCP for the financial year 2020 has been revised to a loss of between $50 and $100 million.

“This compares to the previous guidance of a positive EBITDA of $50 to $100 million before the price weakness as a result of the decline in oil prices and the COVID-19 global demand reduction,” says management.

As such Sasol has started a process to secure adjustments to debt covenants from its lenders (if it becomes necessary) and would announce any changes that might be needed and agreed to.