Back to basics for Sasol’s Grobler following perplexing, damaging Lake Charles imbroglio

Fleetwood Grobler, CEO, Sasol

O for a peek at the separation agreements between Sasol and those members of its Lake Charles Chemicals Project (LCCP) team found to have negligently mismanaged the venture.

No project team member was accused of criminal activity, and presumably they will move on to other posts, whilst the joint CEO structure that oversaw the corporate disaster – consisting of Bongani Nqwababa and Stephen Cornell – has been dismantled with both executives leaving the group. Their voluntary resignation was described by Sasol chairman, Mandla Gantsho, as an act of valiance.

According to Sasol CFO, Paul Victor, the joint CEO structure was installed in order to avoid the kind of train smash that happened anyway. Sasol had a “… big capital project far away from home,” he said in an interview, flanked by Sasol’s new CEO, Fleetwood Grobler. “We needed to make sure US stakeholders were taken care of,” said Victor who is clearly not responsible for the structure (it was the board’s idea), but was nonetheless attempting to give it context.

In the end, the unimaginable happened with LCCP costing roughly 50% more than its original $8.9bn price tag when first scoped in 2014.

The whole affair is a bitter/sweet wrap-up in which – to give credit where it’s due – Sasol has been expedient in the way it has appointed fresh management (note Eskom). It does, though (somehow), still lack transparency. After all, it has hailed as heroes the managers paid handsomely to take responsibility.

“Boards appoint CEOs whether they be singly or jointly,” said Grobler when asked if he preferred a structure in which he was the sole driver. Quite so: Gantsho wasn’t present at the media briefing this week. He left a message by video in which he read out the media statement already published earlier in the day.

In any event, Grobler has begun the mop-up, starting with visits to shareholders who will presumably hear more of Sasol’s plans articulated last month in which it will attend closely to smaller, high value projects in its traditional base. Grobler fits the bill in this regard: he’s a home-grown, safe pair of hands.

Sasol’s established business still appears to be solid, partly thanks to former CEO, the Canadian, David Constable. Criticised for taking home a R47m pay-check in his last year during 2015, Constable, nonetheless, modernised Sasol.

(Although, he did cut a raft-load of jobs occupied by 55 to 65 year olds – not always the best because experience stands for a lot. Just ask Mark Cutifani at Anglo American who has spent the last five years re-skilling the group after a cost-driven restructuring exercise left it woefully under-resourced).

DEBT/DIVIDENDS

The immediate task at hand is to contain debt levels. Victor says the company is in no danger of breaking covenants with lenders, but debt will get worse before it improves. Ultimately, shareholders will want to see whether the interim dividend is resumed.

Standard Bank Group Securities analyst, Adrian Hammond, thinks dividend resumption is unlikely for this and even next year at current spot prices. And in managing the balance sheet, further debt would only put covenants in danger.

The likeliest scenario, he says, is the sale of non-core assets including Sasol’s old Lake Charles cracker, the South Africa ammonia business and Canadian shale assets which would be preferable over selling the South African coal assets. A 5% equity raise should also be considered whilst additional hedging of the rand is also necessary, in his opinion.

Asked to comment on speculation Sasol was to sell its 37 million tons a year South African coal mines, most of which send coal by conveyor to Sasol’s coal-to-liquids plant at Secunda, Victor says no decisions have been made. He added, however, the company had invested in coal reserves to 2050 and provided the group with liquids cash costs of $35/barrel – one of the reasons it was able to endure the perilously low oil price of 2014.

In a context of scrimping and saving, selling coal mines to minimise the carbon footprint cost versus entering into potentially expensive coal sales agreements with potential buyers of the mines might be one of the easier decisions Grobler will have to make.

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