A subtle coup has taken place in a space-age building on the edge of Sandton City: Sasol seems to have been taken over by accountants.
This week the group announced its new strategy for the next decade to 2030 and it heavily favours a strong balance sheet rather than grand projects such as its Lake Charles chemicals project in the US.
Joint-CEOs Bongani Nqwababa and Stephen Cornell emphasised in an interview with Business Times that Sasol now had to balance the need to pay down debt with the need to increase dividend return to shareholders, as capital expenditure takes a back seat until 2022.
They said the focus would be on a consistent dividend of 40% of its earnings over the next five years and 45% from 2022.
Nqwababa said the priority to deleverage the business and return value to shareholders did not mean they would be folding their arms.
They would be pushing for continuous improvement in the group's business, primarily through digitisation, which was expected to raise Sasol's return on invested capital by 2% by 2022.
Value generated could be used between now and 2022 for small to medium-size acquisitions in the range of $500-million (about R7-billion) to $1-billion, Nqwababa said. After that, Sasol's balance sheet would open up more and the group would be able to afford capital expenditure of more than $1-billion.
"It's a balanced approach to capital allocation because we want to invest on a more regular basis, because these big-lump boom-and-bust projects are not the right way to allocate capital," he said.
This is a far cry from the ambition and aggression of Sasol's pursuit of the Lake Charles project. Now 79% complete, it will cost an expected $11.13-billion - Hurricane Harvey added an extra $130-million - when it is operational in 2021. The group's market value is just more than $22-billion.
The once engineer-led company is now filled with accountants - which some analysts said was being reflected in its conservative growth investment plan.
Bruce Williamson, an analyst at Integral Asset Management, said the deeper influence of accountants in the business over that of engineers was a good thing because tackling big projects that took up about 10% or more of the company's market cap made a big difference to costs.
Williamson said this situation would make Sasol more aware of its capital allocation and prompt it to question whether it should invest in projects which could take a long time with cost overruns - such as the added costs of Lake Charles due to the hurricane - or go for good, quick, small to medium-sized projects that would yield returns.
An analyst who did not want to be named said when Sasol was led by engineers, the company was focused on building projects, while now it was more about keeping the balance sheet attractive for investors.
Cornell, though, said Sasol was working hard to try to prevent the company from being led by accountants. He said the group executive committee had come up with the framework of the strategy. The company had a team of 10 on the committee, with six of them being engineers or scientists.
"What we are trying to do is to put limits - where limits are needed - in place. So we looked at how can we limit the risk, how do we determine the amount of growth, capital growth, and how we are going to determine maximum growth to shareholders," Cornell said.
He added that the group executive committee had said that much thought had gone into the decision to spend more than 10% of the company's market capitalisation.
"We just want to be very careful as to how we do it; we just want to balance maximum shareholder value and halve the risk, and everyone is aligned to it," Cornell said.
Lift earnings
Cornell said that the shift happened when the Lake Charles project was commissioned.
"It is the size of the facility and the earnings it will generate when it comes on stream in fiscal year 2021."
The chemical part of the business already makes up more than 50% of the company's earnings. Nqwababa said that on its own, the Lake Charles chemicals project would lift earnings by 20%.
In its new strategy, the company was also reviewing the more than 100 assets in its portfolio. So far it had reviewed about half of the portfolio and would have finished reviewing the other half by the end of its 2018 financial year.
Nqwababa declined to spell out which assets, apart from the Canadian GTL operations, would be affected or would be safe from being disposed of by the company in its portfolio review.
But he said that its South African assets, which included coal and synfuels assets in Secunda and its Sasolburg operations, would be safe.
Cornell added, though, that although the vast majority of the assets would be retained there might be small pieces of the businesses that would not be kept.
Sasol chief financial officer Paul Victor said that in the half-completed review that the company had done so far, it had recognised about 14 assets that it was thinking of relinquishing or over which it would enter into negotiations, which would have implications for jobs.
As the petrochemicals business becomes more focused on its core assets and being globally competitive in its chemicals businesses, Sasol said it would no longer invest in greenfield gas-to-liquid projects, originally the core of the business.
Nqwababa said this decision was driven by data, which showed that the oil price was no longer just a "cyclical issue but a structural issue as well" moving into the future.
Maurice Radebe, Sasol's head of energy and executive vice-president, said that this was also being influenced by the regulations that the world had seen being imposed, in terms of the stance Europe was taking on diesel fuel.
Nqwababa said: "We struggled to convince ourselves that GTL will continue being viable, so we then took this decision. It's emotional, I won't lie about that, but we need to overcome that emotion over time."
No crude oil refineries
The company had also taken a decision not to invest further in crude oil refineries and to further invest in its gas-to-power projects in Mozambique and exploration projects in West Africa as well as fuels retail footprint in Southern Africa.
As it was still relying heavily on its Lake Charles business for the strategy in the future, Cornell acknowledged that the US project was still one of the biggest risks of the business.
"It's probably still our biggest risk, which is why the market is still waiting to see our delivery because the size of it is so significant. That [risk] will hopefully diminish as we get closer and closer [to finishing it]," Cornell said.
Other risks to the strategy, Cornell said, were commodity prices and the rand-dollar exchange rate. The company has in the past hedged the oil price, which it is much exposed to, and has hedged the exchange rate as well.
Sasol was break-even with oil at $35 a barrel and was cash-generative at $40. The strategy was planned around an oil price of about $60 a barrel long term, with a worst scenario of $50.
"Right now we hedge strongly because we have so much liquidity, we have to protect our balance sheet," Cornell said.
With commodity prices, the company said that the board had approved of the decision to start hedging ethane prices when the ethane cracker project was commissioned next year.
"So we go from one macro risk to another macro risk. When the oil prices start to reduce, the price for ethane will start going up," Cornell said.
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