As a gloomy Friday afternoon in Joburg turned into a rainy evening, the four-hour AGM of chemicals and synthetic fuels company Sasol finally wrapped up.
It had been a torrid afternoon for CEO and Sasol-lifer Fleetwood Grobler. He somehow kept his composure throughout, as a litany of tough questions and allegations were submitted online at the virtual AGM.
The annual meeting offers a rare opportunity for ordinary investors to engage with company management. And, after a harrowing 2020, there was a lot that shareholders needed to get off their chests.
It was an ill-tempered affair, as activists grilled executives on their plans to tackle their environmental footprint, especially Sasol’s enormous greenhouse gas emissions, and investors fumed about paying vast amounts to executives for awful results.
If there was any doubt that investors were angry, the voting results should have given Grobler and chair Sipho Nkosi a wake-up call.
For example, 23% voted against re-electing veteran directors Colin Beggs and Stephen Westwell, 17% against re-electing directors Moses Mkhize and Mpho Nkeli, and 7% against reappointing auditor PwC.
On remuneration, the repudiation was equally clear: 28% of investors voted against Sasol’s remuneration policy and 56% against its implementation report.
What stuck in shareholders’ throats most was the princely R95m paid out to former joint CEOs Stephen Cornell and Bongani Nqwababa, who both left the company under a cloud over the disastrous Lake Charles Chemicals Project (LCCP) fiasco.
The LCCP, situated in Louisiana and built at a cost of $12.9bn, has been Sasol’s worst-ever investment.
But this US horror story has also hurt investors badly: in October 2014, when Sasol green-lighted Lake Charles, its share price was R550; today it is 77% lower, at R123.
This is what happens when you deliver a megaproject years late and $4bn over budget. And it’s not just bad luck: an independent review found there was "mismanagement" and poor oversight of the project, which led to conduct that was "inappropriate, demonstrated a lack of competence and was not transparent".
Sasol, it’s clear, is in deep trouble. The enormous cost overruns have stretched its balance sheet to unsustainable levels, with debt last reported as R190bn.
Then Covid-19 hit, bringing with it ultra-low oil and chemicals prices. It was a kick to a company that was already down, causing it to breach debt covenant levels set by its lenders. To tame the debt, Sasol sold assets and accelerated cost-cutting plans — and signalled a possible rights issue.
Whether this will work remains an open-ended question.
‘Selling off the family silver’
Established as a state-owned company in 1979 and privatised in 2000, Sasol is a major employer and taxpayer that produces a third of SA’s liquid fuels. As a mainstay of the JSE, it also features in almost every pension fund.
But Sasol’s fall has been dramatic.
The share price dropped from R450 a share in May 2019 — when the full extent of the Lake Charles mess became known — to R300 by the end of the year. At the peak of the Covid-induced oil price slump, it hit R40. It has recovered, but its path back to its former heights is anything but assured.
"The company is coming out of one of the most difficult periods it’s ever been in," Grobler tells the FM this week, after the bruising AGM.
But he doesn’t want to look in the rear-view mirror, he says.
"I am focused on the road ahead. We have a vehicle that’s fit for purpose and we have a destination. My team and I are focused on the future and we’re determined to succeed."
Grobler believes he and the management team have already demonstrated their resolve, especially through a "black swan event" such as Covid-19.
"We didn’t go under. Because of Covid, the low oil price and falling demand, we were [close to] our nose going under the water but we managed it. We took decisive measures and we survived that."
The balance sheet has been stabilised and is on the path to restoration. The group has also delivered on its self-help measures, which delivered $1bn in savings last year, and is on track to deliver $1bn more this year.
Lake Charles is also now online.
And the group has delivered a 2030 greenhouse gas emissions roadmap, as it works towards its 2050 plan, Grobler notes.
The investing community will take some convincing.
Paul Theron, founder and CEO of Vestact asset management, for example, was asked on Twitter earlier this year if Sasol was a good buy, considering its low share price. He replied, with characteristic flamboyance that he’d rather put his private parts "in a crocodile’s mouth".
Despite Sasol’s efforts, Theron says it’s still a share he’ll avoid.
"It’s a mess. It’s hard to know where it ought to trade, and what its future cash flows look like. The cuts to the asset base make sense if it means that a deeply dilutive capital raise can be averted, but it seems like selling off the family silver."
Sasol has realised $2.6bn in value from asset sales, including the disposal of 50% of the Lake Charles base chemicals business to LyondellBasell Industries for $2bn — a deal approved by shareholders on Friday.
"With this divestment, the profile that Sasol has been trying to achieve over the past decade — to be a more global chemical company instead of an SA-based oil and energy company — is now permanently impaired," says Abdul Davids, head of research at Kagiso Asset Management.
On Davids’ numbers, Lake Charles has the potential to bring in about R200bn of revenue a year, of which Sasol’s share will now be R100bn.
The sale is a compromise, Grobler says. "I feel sad that we couldn’t run it on our own, but I also know it’s the right thing for the company to relieve pressure on the balance sheet. We got the value that I believe we were looking at and we have the upside [should commodity prices rise] to get further value back in the future."
Protea Capital Management CEO Jean Pierre Verster says the project is one of multiple doors open to Sasol that led out of SA and its carbon-heavy synfuels operations, and into other businesses.
"They’ve walked through all these doors only to find themselves in another room with no exit," he says. "All roads have led back to where they started. I don’t know what they do next."
The undeniable fact, he says, is that the sale of a stake in Lake Charles has subjected Sasol to a peculiar constraint. "They had to sell half of the ‘crown jewels’ to get out of a balance sheet problem, and that leaves them with very few options. I don’t think they themselves know exactly how this will play out," says Verster.
From an investment point of view there is a lot of uncertainty regarding the future, and that makes Sasol quite a speculative investment at the moment, he says.
Rights issue ‘unavoidable’
The sale of the stake in Lake Charles does not eliminate another major unknown — the rights issue.
Sasol CFO Paul Victor says it could be as large as $2bn or as low as zero. There are too many moving parts to say now, and a final assessment will be made in February.
Verster thinks a rights issue is unavoidable, given the fragile state of Sasol’s balance sheet. This time, a rising oil price is unlikely to save the day.
"They have hedged a lot of their debt, currency exposure and future oil sales, which means the one thing, historically, that has been good for Sasol, which is a higher rand oil price, will effectively be capped because of that hedging."
The company may have forfeited its get-out-of-jail free card, but its balance sheet will at least be protected against an oil price drop, which would otherwise have been disastrous. It is in any case working on the assumption that oil prices will be lower for longer.
In the lead-up to the rights issue, Verster thinks Sasol will need to craft a positive narrative to try to support the share price. This may buy it time, so it can declare a rights issue at a better price next year — which will mean less dilution for current shareholders.
Getting hot in here
Amid all these wider existential issues, the heat is also on for Sasol to produce a credible plan for its "decarbonisation".
It’s an obvious target too, considering that Secunda is the largest single point of greenhouse gas emissions anywhere in SA — a dirty-energy dinosaur in an investment world increasingly intolerant of this.
Using its proprietary Fischer-Tropsch technology, the plant produces oil out of coal — a boon for SA’s energy security, but a liability in a world concerned with combating climate change.
The company has committed to reducing its carbon emissions by at least 10% by 2030.
Though Sasol emphasises that this is in line with the Paris accord on climate change, it’s a point that’s regularly criticised, with investors and activists alike describing the target as "unambitious". And it’s hard to disagree with that assessment.
But Grobler tells the FM the company isn’t taking this lightly.
"People think, ‘there’s another corporate, they are fat and happy and just want to pollute the world and do nothing about it and just take profits’," he says. "That is not the thinking in the nucleus of Sasol. We know decarbonisation is the single biggest thing we need to get right to exist as a company."
Sasol and the activists want the same things, he says. "The thing is just that we need to calibrate what is practical, what is feasible and supported by science to achieve what we want … There is a solid trajectory — but you can’t promise something pie in the sky with no substance to back it up. You have to have feasible, science-based plans."
The key to whether Sasol can do this will be its ability to secure enough long-term supply of affordable gas, potentially from neighbouring Mozambique. One ton of gas has a carbon footprint that is 60% lower than a ton of coal, Grobler says. But the infrastructure to bring in the gas will take time. In the interim, Sasol is exploring options to import liquefied natural gas (LNG).
In the longer term — perhaps 20 years’ time — Grobler says the "holy grail" for Sasol will be to use green hydrogen, produced through renewable energy, in its processes.
If it sounds as if Sasol is moving in the right direction, it hasn’t been without an immense fight. For three years, it flatly refused to table any climate-related resolutions at its AGM.
Now, perhaps sensing that its investors are becoming increasingly fed-up and strident, it has committed to table an "advisory vote" on its climate strategy at the meeting next year. Being an advisory vote, it’ll ultimately mean nothing if it’s voted down, but it’s something at least.
Last year, the Old Mutual Investment Group proposed a resolution at the AGM to get Sasol to make a public commitment about executive remuneration, and its carbon reduction strategy.
Sasol’s promise to table a resolution on its climate strategy at the 2021 AGM is second prize, "relative to our original proposed resolution", says Jon Duncan, who heads the responsible investment programme at Old Mutual Investment Group, "but we’ll take it".
On one level, whether it is a binding or nonbinding advisory vote is a legal technicality, Duncan says. "What’s important is that these issues are now put in the open and are being discussed at AGMs. The bigger issue from a corporate governance perspective is not climate change. It’s more a principle around shareholder rights and resolutions."
‘Binding say on pay’
Predictably, given how it lavished R95m on its two failed CEOs this year, remuneration was a hot topic at the Sasol AGM.
In SA, the vote on remuneration is also just an "advisory vote" — which is out of step with global governance norms.
After the 2008 global financial crisis, the UK gave shareholders a binding say on executive pay, Duncan explains. Australia followed suit — and it’s now seen by many as an important evolutionary feature for the SA market too.
At present, if a JSE-listed company doesn’t get 75% approval from shareholders, it is forced to "engage" with them on this matter. Duncan believes SA must shift towards a "binding say on pay".
It’s the sort of thing that might strike fear into the hearts of executives — especially after Friday’s AGM, where 56% of investors voted against its implementation report, which details the golden handshakes for former CEOs Cornell and Nqwababa.
"That’s pretty unprecedented in SA and it’s a really strong show of shareholder — quite frankly — disgust," says Tracey Davies, executive director of Just Share, a shareholder activist group. It sends a strong signal that the company must change its approach to remuneration.
"This is the first opportunity that shareholders have had to express their displeasure. Of course, it doesn’t change the fact that they got the money and that’s part of the problem with this system, and with nonbinding votes as well," Davies says.
Meanwhile, a special resolution relating to remuneration for nonexecutive directors only narrowly obtained shareholder approval, with 76%.
"Most of those directors have been there right throughout the Lake Charles debacle," says Davies. "It is in some sense extraordinary that they keep getting elected. But not re-electing directors is still not something institutional investors are comfortable with, so the way they have expressed their dissatisfaction is on the remuneration."
The negative show of voting is indicative of quite a strong global shift, "where people are starting to understand that the way you solve the problem is by aiming at the pay of the people who run these companies and ultimately at their very jobs."
Of course, if more people expressed their displeasure at companies such as Sasol, these sorts of outlandish pay packages might become a thing of the past.
Says Verster: "The beneficial holders, many of them pensioners, don’t even know that they hold Sasol shares through the pension funds, and the pension fund trustees also actually control the portfolio, but they farm it out to asset managers who don’t always apply their minds in terms of voting."
Verster sees a shift ahead where, increasingly, some resolutions proposed by management teams will fail to obtain more than 50% of the vote, or shareholder-proposed resolutions will be passed and management teams forced to act accordingly.
Staying relevant
The stress of the year is by no means over for Sasol which, at an investor update on December 2, is expected to put meat on the bones of its "Sasol 2.0" strategy.
"[We] have to do something to stay relevant and to be a company that’s got cash flow and can pay dividends and can grow," says Grobler. "We are going to really give the financial metrics that we will be pursuing, which will make the company nimble, agile, with streamlined cost structures and defined growth and sustainability objectives."
Sasol, he says, "is on a trajectory you have never seen before".
It’s unlikely to involve any acquisitions. Even if Sasol had the cash for it, which it doesn’t, it’s likely to be on a very tight leash, says Davids. That’s due to "its track record and the low level of confidence shareholders have in its ability to do anything remotely related to projects or acquisitions", he says.
At some point, shareholders need to decide if they want to own what is primarily a dirty coal-to-fuel business with finite coal supply, a large carbon footprint and a huge tax burden, Verster says.
"If the answer is no, then how do you make sure your management team transitions the company to a greener future while protecting shareholder value? There is no easy answer to this conundrum."
Asief Mohamed, CIO at Aeon Investment Management, has low expectations for Sasol’s ability to become a clean energy company. "It’s not because it isn’t willing to try, but because the solutions just aren’t there," he explains. "They aren’t economically viable. That’s the nub of the whole thing."
Davids believes there is no getting away from synfuels as the heart of the Sasol business. Maybe the future of Sasol could be to re-engineer plants such as Sasolburg and Secunda, or cut down on some of the more polluting modules in those plants to get a smaller carbon footprint, he says.
But, realistically, "all management can do is to make Sasol a much smaller company — but a much more viable and profitable company potentially as well".
Perhaps implausibly right now, Grobler argues that Sasol can even become the hottest "green investment" around.
He argues that its Fischer-Tropsch technology, which makes use of hydrogen and carbon to produce fuel, means it could be the only company in the world that could, theoretically, make fuel from green hydrogen and captured CO² — assuming these technologies are one day commercially viable.
"So theoretically we can make everything in our value chain green," says Grobler. "If we could do that, we would be the greatest green company in the world."
People tend to fixate on problems, he says. "They don’t see there is a transition path."
Old Mutual, as a long-term shareholder, "would like Sasol to win", says Duncan. But to solve the strategic conundrum the group faces, it needs a focused management team.
"It’s going to come down to technology and capital availability and scalability. There is a lot of interesting tech that is promising. But can it get to scale quickly enough at the right price point? That equation also changes if the price of carbon goes up," he adds.
"Sasol has smart people, they are a technology company. There are tough choices ahead, but they are engineers — it’s in their DNA."
Before all of that, however, the first critical step is to fix the balance sheet. "Without that any path forward is not going to happen," says Duncan.
Davies believes Sasol is clearly trying to respond to criticism. "But I think at the core of it, there is still too much of a disconnect between what it says and what it does for people to be convinced that it really is on a different path."
It’s a trust deficit the company has entirely earned, due to the Lake Charles debacle. Still, Grobler says he fully subscribes to the view that trust is earned, and the company is hard at work to earn it back.
Soon, "the Sasol name will not be something that everyone tramples on", he says. "This company, I’m telling you, is getting back to where it should be, which is a national champion and a company anyone in SA can be proud of."
In six years the Sasol share price has fallen 77%, and shareholders and investors are asking increasingly angry questions
— What it means:
A complex corporate culture
It was at the height of the construction of the Lake Charles Chemical Project that Sasol decided to skip a “heartbeat survey” — an employee engagement tool that is intended to drill into the hearts and minds of employees and assist in identifying problem areas as they arise.
Had that survey been done, there would surely have been an amber alert over the North American project, where delays and enormous cost overruns flew in the face of assurances from Sasol management that all was in hand.
In the end, the project was three years late and 45% over budget — having ultimately ballooned from the original estimate of $8.9bn to $12.9bn.
The plant is now finally complete and so, too, is a deal to sell off 50% of the base chemicals business there as Sasol moves to dispose of assets and shore up its fragile balance sheet.
A subsequent independent review of what went wrong found there was a “culture of fear” at the project level.
Current Sasol CEO Fleetwood Grobler, who as executive vice-president of Sasol’s chemicals business was deployed to the scene at the time, said that was his finding too. It started with the five leaders on the project team, and trickled down from there.
“If I tell you how many weeks I spent just talking to the teams and making sure that, if they had ever experienced that their voice didn’t count — that was now gone,” says Grobler.
“Everyone is there to contribute and you can’t contribute if you don’t talk. That was my mantra with the team there ... It’s about having an open and very collaborative discussion and culture.”
Grobler believes the company has now put that culture of fear behind it. “That project [Lake Charles] is complete,” he says. “We did an updated heartbeat survey and the results are equal to or better than the rest of Sasol’s operations.”
But bad culture is bad business, says Protea Capital Management CEO Jean Pierre Verster. “The bottom line is a company culture definitely does have an impact, especially regarding accountability and feedback,” he explains. “In Sasol’s case, it was a question of how quickly bad news was able to travel up the chain of command.”
Abdul Davids, head of research at Kagiso Asset Management, notes there is a body of research on the link between bottom-line profit performance, and the culture and organisational ethos and ethics of a company.
“That definitely has a role to play, and if you’re middle management in a company and you’re under pressure to deliver results and to toe the company line, typically mistakes would be covered up and glossed over, and facts would be misrepresented to placate management,” he says.
“That fosters an environment of irregularities in terms of accounting, and there are unfortunately quite a few companies where we’ve seen that — take Tongaat and PPC.”
Verster believes Sasol’s culture had a material impact on how slowly the bad news travelled from Louisiana to the head office. And he’s of the opinion that the company could improve its corporate culture.
But Sasol isn’t alone. The bigger an organisation gets, the more complex it becomes — and complexity often brings with it less desirable cultures, Verster says.
Asief Mohamed, CIO at Aeon Investment Management, says many large SA corporates suffer not just from bad culture, but also from arrogance — traits that have their roots in the country’s history.
“In the apartheid days, corporate SA thought it was very good because it made excessive profit,” he says.
The reason, however, was that most competition was kept out of the marketplace. The same applied to managers.
“They made super and excess profits, so they all thought they were very good, but they were not self-aware [of the fact] that 90% of the population was not competing,” Mohamed says. “When they went overseas, they couldn’t compete — same thing with Sasol.”
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