Sasol, back at last on a sound operational footing with a healthy balance sheet, is now gearing itself up to face one of its biggest challenges yet: how to market itself to new and existing investors in a world that has fallen out of love with fuel companies.
After shares in Sasol hit a low around R20 in March last year amid a global oil price collapse and concerns about spiralling debt, many could have been forgiven for thinking the end was nigh for the more than 70-year-old energy and chemicals company. But thanks to a herculean effort by its management team under CEO Fleetwood Grobler, the group has made a dramatic comeback, not only in terms of share price performance (the shares closed at R196.10 on Friday), but also operationally and financially.
In its full-year results for the year ended June 30 2021, the group reported that it had more than halved its debt to R90bn from a massive R189bn in the previous year thanks to a combination of asset sales totalling some $3.8bn (about R58bn) and cost cutting. Most important, it did this without the necessity of a rights issue, which would have diluted shareholder value further.
The group also swung into headline earnings a share of R39.53 after reporting a loss of R11.50 in 2020, as oil and chemicals prices improved globally, with Grobler telling the market this week he intends helping Sasol regain its blue-chip status as a South African champion. One of the pressing issues the group, which is SA’s second-biggest carbon emitter, is now looking at is how to revise its own emissions reduction targets upwards as the pressure around the globe increases for the world’s biggest polluters to meaningfully help tackle climate change.
According to Reuters, a UN panel on climate change told the world on Monday last week that global warming was dangerously close to being out of control and that greenhouse gas levels were already high enough to guarantee climate change disruption for decades, if not centuries. It quoted UN secretary-general António Guterres describing the report as a “code red for humanity”.
Sasol had originally promised to cut carbon emissions by at least 10% by 2030 but Grobler, in an interview and in a presentation to analysts this week, said the group would unveil even greater commitments to reductions at its capital markets day to be held on September 22 this year.
Grobler also believes the technology the group already uses to make synthetic fuels and chemicals will be effective, over time, in using renewable energy and environmentally friendly sources of hydrogen to make its products. In this way a new course for the company will be plotted in the decades ahead.
“We are very aware of that pressure and I believe Sasol has taken that head-on. We are going to announce an increased ambition and pathways to achieving our emission reductions in September,” said Grobler.
Wade Napier, diversified resources analyst at Avior Capital, agrees that Sasol could well become a “South African champion again” but said it faces challenges in marketing its story in a world increasingly clamouring for climate-friendly investment options.
“I think it can be a South African champion but I think the realities of Sasol are that it is operating a fuels business in a global environment that doesn't necessarily like fuels businesses at the moment,” said Napier.
We are going to announce pathways to achieving our emission reductions.
—
Fleetwood Grobler
He believes that increasingly there will be a greater emphasis on the part of investors on carbon disclosure and emissions, and how companies align themselves with climate accords such as the Paris Agreement 2050. Under the agreement, the EU aims to be climate-neutral by 2050 in terms of emissions. “Even if the underlying performance of the business is strong [at Sasol] as we’ve seen today and expect in the next year or two, I don’t know if that necessarily translates into the share price environment,” said Napier.
“That is the next big challenge. It’s not the financial performance, it’s how do you market yourself to investors who aren’t looking at these types of fuel businesses and also investors who maybe own Sasol shares but will become stricter about what businesses they own or are even allowed to own?”
He said financial markets are “always forward-looking” and “inevitably” are looking beyond Sasol’s 2030 promises to what can be delivered by 2050.
Prince Mopai, equity analyst at All Weather Capital, said there could increasingly be a disconnect between how the market values Sasol and what its underlying value is, “because of the way the world is increasingly seeing fossil fuels”. He said with electric vehicles and hybrid cars expected to “come in rapidly to challenge cars with internal combustion engines, you are going to see reduction from an oil demand point of view, which speaks to Sasol’s energy business going forward”.
“This won’t happen in South Africa possibly for at least the short to medium term, but potentially globally, you are probably going to see electric vehicles coming in strongly to challenge the internal combustion engines which purely rely on fossil fuels such as oil.”
Mopai said that “all in all” it’s up to Sasol to try and share with the market how it is going to address high levels of emissions by “bringing in alternative ways of neutralising their current effects”. This is a big challenge for Sasol and it is up to “management to give us some level of direction and some confidence in what they are going to do to”.
Sasol’s commitment to cut carbon emissions by 2030, a target which it now plans to revise upwards.
— IN NUMBERS: 10 %
As far as Sasol’s capital markets day in September is concerned, Grobler said there are definitely going to be major changes announced.
“We are significantly increasing our greenhouse gas reduction ambition by 2030. The 10% number is going to change upwards, the details of which we are going to announce at our capital markets day.”
Grobler could not give more detail on this as Sasol was “still in the governance process to sign all of those [plans] off”.
“Suffice to say there would be a significant increase in our emission reduction. We will also share ... how we are going to achieve that and what are the pathways we’ve got towards 2050 to get to our ultimate ambition.”
Grobler said one thing that “people always forget” is that Sasol already holds the key to a more environmentally friendly future with its proprietary Fischer Tropsch technology, which at the moment makes fuel and chemicals from coal and gas.
He said the Fischer Tropsch technology is “agnostic about whether carbon comes from a renewable source or from coal or from gas or from oil”. In other words, the technology enables Sasol to use non-fossil fuel derived carbon and hydrogen to produce its chemicals and fuel products.
As for the hydrogen needed in the fuels and chemical-making process, the technology is also “agnostic” about where this comes from. It can come from coal or gas, known as “grey” hydrogen, or water, which is called “green” hydrogen. Green hydrogen is obtained from water using electrolysis, which does not harm the environment.
“We are one of the few companies that can, over time, reinvent our feedstock to a greener state, or maybe eventually all-green feedstock, and have the same kit to produce the products we do,” said Grobler.
“Of course we can’t flip the switch today to achieve that. It will happen as the cost curve of green hydrogen and renewables reduces, to enable us to introduce all of this green feedstock. But the point is it is feasible and we can do that at the right price points when it makes economic sense. Only a few companies have that ability to switch.”
Grobler said this makes him “positive” about Sasol’s long-term ability to “address its decarbonisation journey in a way that it can reinvent itself”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.