Can Sasol, South Africa’s dirtiest private company, save itself?

Sasol — the petrochemical company founded in 1950 to provide the apartheid state with energy security — must be feeling as if it’s just done five rounds with Dricus du Plessis, South Africa’s mixed martial arts world champion.

“You’ll get the NGOs who say we don’t do enough, you’ll get shareholders who say we’re not doing enough for them, and those who say, from a country point of view, we want you to succeed,” says outgoing CEO Fleetwood Grobler.

The 63-year-old Grobler eloquently sums up the turmoil swirling around South Africa’s largest energy company, from the hundreds of pension funds which hold a combined R27bn of Sasol’s stock and aren’t happy that value has sunk 46% in the past year, to climate activists who have made it public enemy No 1 for moving too slowly to ditch fossil fuels.

Sasol’s harshest critics don’t believe it will even exist in a few years; that it will have “stranded assets” — principally its Secunda plant, the world’s largest single emitter of greenhouse gases. 

Others (Sasol obviously included) believe it can reinvent itself from a carbon-heavy relic into a green machine, with two stated aims: cut carbon emissions 30% by 2030, and slash them to zero by 2050, all while producing fuel and chemicals in volumes that would make it, and shareholders, money.

That’s an ambitious goal. And the consensus seems to be firmly against Sasol doing anything right, which explains why a hard-hitting analyst report released by JPMorgan last week helped pull the rug from under an already frail share price.

Calling Sasol “optically cheap”, JPMorgan slashed estimates of what it will probably  earn in the 2024/2025 year by up to 33%, and raised doubts about its ability to cut debt (which hit a daunting R125.6bn by June last year). The bad news is that even though Sasol’s share price has tumbled in the past year, JPMorgan reckons it hasn’t hit bottom yet.

For good measure, the analysts argued that Sasol would attract investor interest only if it started paying out a much higher dividend — a tricky ask, given that the company has to finance a costly shift to cleaner fuels.

 “We continue to find Sasol difficult to value given the uncertainty regarding longer-term cash flows but believe new investors are likely to want double-digit dividend yield to offset risk,” read the report.

Unsurprisingly, Sasol shares crumpled 9% on the day, taking the stock back to 2005 lows (its extreme plunge to less than R30 during the March 2020 Covid sell-off aside). 

Seleho Tsatsi, equity analyst at Anchor Capital, says that relative to what people had been expecting of Sasol six months ago, earnings estimates have dropped by about a fifth.

“In June 2023, Sasol’s core headline earnings per share was about R48 and it looks like that number could come in lower by about 16% [this year].” 

Any drop in profit is a big deal because Sasol needs cash — lots of it — to fulfil its grand vision of transforming itself into a much greener beast than it is now.

Consider this: Sasol estimates that the cost of slashing emissions by 30% will be anywhere between R16bn and R25bn. That’s money that shareholders won’t be taking home in dividends.

Overlay that with all the unpredictable factors affecting the oil price and chemicals market and you can appreciate the tightrope Grobler is walking. 

“It’s almost like you’ve got the 100m athlete who runs the race and, 20m before the end, he shoots himself in the foot because he has paid too much to shareholders or underperformed in terms of decarbonisation. So that’s the fine balance,” says Grobler.

Which raises a rather existential question for a company that is a staple in many South African pension funds: can an entity in which fossil fuels are fundamental to its DNA ever truly transform itself into anything close to “green”?

‘No credible plan’

Sasol, at its heart, is a sort of fossil-producer squared, using coal to make fuel and chemicals by means of the Fischer-Tropsch technique perfected by German scientists in the 1920s. 

The technology helped South African Synthetic Oil Ltd — so named by its first employee, Etienne Rousseau, in 1950 — become a benchmark of apartheid South African self-sufficiency. The first plant was in Sasolburg in the Free State and the second at Secunda in Mpumalanga. For decades, it was a top share in local pension fund portfolios, being the only way that locals could tap into the global oil market.

Yet the same technology — producing oil from coal and, latterly, from gas — means Sasol is a polluter of global (dis)repute. Its Secunda plant, an oil-from-coal behemoth, emits more carbon emissions than Portugal.

As JPMorgan analyst Alex Comer crisply wrote in his report to clients: “In our view there is no credible plan for decarbonisation post 2030. Indeed, it’s a moot point as to whether, given the technical and financial challenges, Sasol should even bother trying — better perhaps to own up to an intractable problem and run Secunda for cash for as long as it can.”

Grobler doesn’t exactly bristle at this suggestion, but he’s quick to rattle off a volley of stats to counter it.

“China emits 15-billion tons of CO2; South Africa emits 500Mt of CO2, and Sasol is 10% of that. It’s easy to take Portugal, which is a nonindustrial country, as a comparison. Ours is a coal economy. And we have a clear pathway. This is the perspective I think sometimes people lose,” he says.

Do companies in China have the same pathway to decarbonisation as the corporates of South Africa, he asks rhetorically.

Vuyo Kahla, one of Sasol’s executive vice-presidents, is more explicit: “I don’t think it’s ludicrous of us to expect to get into a net zero position by 2050 in light of the pathway we’ve worked on.”

Actually, Grobler argues, it’s because of its century-old Fischer-Tropsch technology that Sasol can do this. “Our technology doesn’t care whether the carbon [feedstock] comes from coal, or gas, or green hydrogen or CO2 capture out of the air.”

The central issue, he says, is whether these alternatives are economically viable. In other words, Sasol could, theoretically, produce fuel from green hydrogen — and be much more environmentally friendly as a result — if this could be made to work financially. 

Right now, however, that financial equation doesn’t balance.

Promises of hot air

Yet there is immense scepticism that Sasol’s transformation promises are more than just hot air. 

It’s one reason Sasol was forced to abandon its AGM on November 17, after activists from climate change group Extinction Rebellion stormed the stage. The week before, Old Mutual, which owns just over 3% of Sasol, said it would vote against three resolutions at the AGM, given Sasol’s weak performance on climate targets — and urged other investors to follow suit. 

Old Mutual said Sasol’s nonbinding say on climate resolution made “no reference to targets”, and didn’t “sufficiently afford shareholders the opportunity to voice discontent” with progress on its climate change strategy. 

Nicole Martens, Old Mutual Investment Group’s head of stewardship, said at the time that Sasol’s statements about climate change didn’t “align with what we see on the ground”.

The public lashing that Sasol received from Old Mutual is rare for local boardrooms, which suggests the company is struggling to keep its own shareholders happy.

Part of the issue, Grobler says, is that the institutional asset managers which hold shares in Sasol are battling their own ESG imperatives. For example, some simply refuse to invest in companies that are involved in fossil fuels, while others are happy to back companies such as Sasol, Shell or BP during this transition.

“It’s difficult to appease everyone in their goals in their own company. They don’t want to carry something that could impact their positioning. It is becoming more complex. But we’ll have to manage it,” he says.

Still, Grobler is adamant that Sasol isn’t facing a groundswell of unhappiness from its shareholders, including the large institutions. 

“Unequivocally no,” he told the FM two days before the company held its delayed AGM, on January 19.

Sasol, in fact, met with a number of institutional investors ahead of the meeting last week. 

Says Kahla: “There were certain misunderstandings, that because we did not make reference in the AGM resolutions to the 2030 targets, there was a sense that we had back-pedalled, which wasn’t the case.” 

It is easy to see where these “misunderstandings” had come from. 

In its annual reports filed ahead of the AGM, Sasol said it was “uncertain” that it would meet its target of reducing emissions by 30% by 2030, given an “emerging gap to targets” and the need to remain competitive.

Kahla says the company then reworded the AGM resolution to make it clear “that there’s been no change to our emissions reduction targets, and our net zero ambition. So I think that point is now very clear.”

One person who isn’t buying the spiel is Just Share director Tracey Davies. “There is a significant body of shareholders who are not convinced that Sasol’s climate change plan is credible. There are serious problems with it,” she tells the FM.

The stats bear her out: only 77.36% of shareholders who voted on the climate change plan approved it; 22.6% opposed it and 6.3% abstained.

While that might not sound like a lot, Sasol’s other resolutions were approved with majorities upwards of 90%. The vote is also a big drop from the first time the company tabled its climate change resolutions in 2021, when almost 97% approved the plan.

“For a nonbinding vote on a climate plan to have that significant a drop in support, in a world where asset managers are very loath to express dissatisfaction, is significant,” says Davies.

Asked what Sasol makes of this shareholder restlessness, Kahla says the complexity of its transition means “people tend to think that because it’s complex, it might never be done”.

Yet, he promises, Sasol’s commitment to ensuring it becomes a greener company “remains clear and unwavering”.

CFO Hanré Rossouw goes further, arguing that Sasol is “the favourite flogging horse” for ESG activists. “If you want to make a stand around climate, you are going to flog Sasol, we’re the obvious target. There’s loads of stuff you can throw at us,” he says.

But, Rossouw adds, “we recognise our responsibility as an industrial player in South Africa that needs to go green. We welcome the debate — as long as it’s constructive.” 

‘We’re moving no goalposts’

Unfortunately for Sasol, there is plenty that can be thrown at it precisely because it hasn’t moved very fast. 

“They have failed over 20 years to demonstrate that they can significantly reduce emissions, and they’re now expecting people to believe they can do far more in a far shorter space of time,” says Davies.

“Sasol always has a very slick explanation for why they have everything under control but it’s not that difficult to pick holes in it. And their response to criticism is not more accountability, but to lash out and accuse its critics of being clueless,” she says.

As Davies’s criticism implies, the AGM wasn’t exactly replete with happy shareholders. “Sasol shares must be one of the worst large-cap performers on the JSE,” complained one investor during the AGM.

The problem, as Vaughan Henkel, head of securities solutions at PSG Wealth, points out, is that Secunda remains “systemically” important to South Africa, so it is “quite difficult to write the entire plant off”.

And, “without the South African fuel business, [Sasol] will struggle. At the moment, it is delivering, by a far way, the majority of free cash flow.”

So, if Sasol were to shut down its biggest polluter, the company would take a crippling financial knock.

Grobler says Sasol is “looking at” three options to slash emissions: using biomass (specifically, woodchips) from Mpumalanga in the company’s gasifiers or boilers; carbon capture (which isn’t “pie in the sky”, he says) and gas, where Sasol is “doubling down” on its southern Mozambique gas resource, having invested more than $530m to date. 

“If we move to gas, it has an eight times reduction in the footprint of CO2, so if you said I can magic up a gas reservoir, I could decrease our footprint drastically. But the fact is we don’t have that. We’ve got limited [gas] resources and we are exploring for more.”

Grobler believes gas “is the most viable option” and would give Sasol more time to develop the other options. “Eventually if we can get to cost-affordable green hydrogen, that is the ultimate outcome for us,” he says. 

The fact that Sasol is still using terms like “options” and “looking at”, is hardly comforting, more than a decade after it supposedly put in place a blueprint to cut emissions. 

Asked about this, Grobler seems bemused that there’s such scepticism over the company meeting its goals. 

“We have moved nothing,” he says. “The 30% [target by 2030] has not changed since we announced it. The ways that we’re going to deliver that — renewables, turning down of boilers and less coal usage — those remain the same. That’s why I’ve said I find it difficult to understand why some are now saying we’re not delivering on that promise or moving the goalposts.”

Well, if Grobler is struggling to understand where that comes from, he might want to reread his own annual report, which said: “We can provide no assurances that Sasol’s plans to reduce greenhouse gases pursuant to our road maps or otherwise will be successful.”

It cited a number of reasons for this “risk”, including the unavailability of gas to use as a feedstock, the “lack of enabling policy and frameworks” and supply chain problems in the renewable energy sector.

Davies is gobsmacked by Grobler’s claim that everything is on track. “The fact they’ve been unable to secure access to the gas is a big concern,” she says. 

Nor does it help Sasol’s argument that the only reduction in emissions it has been able to achieve happened only when it lowered production, or made its processes more efficient.

Says Davies: “Next year they anticipate that [synfuels] production will go up, so emissions will go up — so then we are left with less than six years where they have to achieve even bigger emission reductions.”

A cost conundrum

One reason Sasol’s stock has been hammered is that it’s only now becoming clear just how much it will cost the company to go green. Already, Sasol has taken a R35bn impairment on the value of its Secunda assets and Rossouw says: “I think a lot of the analysts are [only] now picking up on the cost of the transition.”

Rossouw himself used to be an analyst at investment firm Ninety One, which has been notably sceptical about Sasol’s commitment to the transition. 

“They know we can do it, but because it comes with a cost, they’re maybe a bit cynical that management will not be compelled to do it, which I find surprising given that we’ve given a commitment,” he says. 

This scepticism is another factor weighing on Sasol’s share price, along with the high cost of capital, an uncertain global economy and carbon taxes at home and in the EU. 

Yet comments made by Ninety One’s ESG czar Nazmeera Moola to the Financial Times last year seem to betray a certain wishful thinking. “It is not in our interest for Sasol to shrink the size of the company to meet their climate target,” she told the newspaper.

This suggests investors want Sasol to produce the same volume of green fuel, presumably at a fair cost, with money left over for dividends to boot. Yet it seems unlikely that Sasol would ever be able to create this sort of perfect outcome. 

“The one aspect I think they are missing is that a smaller, more profitable and greener Sasol is also an outcome,” says Rossouw. “As much as people want certainty on the [green transition] road map — we don’t know what market demand will be in 2030, so we’ve got to have some flexibility in matching output with demand.”

Investors clearly won’t be able to have it all: for one thing, Sasol has begun producing green hydrogen — but this clean fuel costs three times more than Sasol pays to produce “grey” hydrogen. “Would the consumer pay more for his fuel or heating products?” asks Rossouw.

These are questions which shareholders are spending a lot of time thinking about.

Last week’s Sasol AGM dragged on for more than three hours — company AGMs can often be wrapped up in 20 minutes. 

Predictably, the company faced a volley of criticism over its emissions targets, and whether its ambitions aren’t far too unambitious. 

“No-one, from a green perspective, is going to be happy with a 30% reduction in emissions in six years. It’s zero or you’re a pariah in the world of using coal as an input. That’s a reality,” says Richard Simpson, fund manager and co-founder of Obsidian Capital.

But Simpson adds that in Sasol’s case, sense ought to prevail, given that Secunda is a “legacy asset and important cash cow” for the company. 

And while Sasol may see itself as the whipping boy for everyone, some of its critics claim that the government cuts it far more slack than it should, given its levels of pollution.

“We wish,” sighs Kahla, when asked about this.

Yet Sasol continues to pollute on an immense scale, particularly in the area around Secunda, where the company hasn't yet met the government’s sulphur dioxide emissions standard, which kicks in on April 1, 2025.

Rather than deal with this problem at home, some analysts say, it has opted to spend more money expanding abroad, including building the disastrous $13bn Lake Charles project in Louisiana.

When this is put to the executives, you get the sense of a collective shrug; that while this is a fair point, the billions in shareholder capital wasted on Lake Charles is now water under the bridge.

Says Grobler: “ESG is central to our strategy and the 30% reduction by 2030 is our biggest investment — we don’t have others of that magnitude. So we need to get it right and therefore it’s central to our operations.”

But Simpson tells the FM that “at the time of pulling the trigger with Lake Charles, perhaps they thought they would get a materially better outcome. But $13bn of capex that went to Lake Charles could have done an enormous amount of carbon emissions reduction in legacy plants within South Africa.”

Ironically, every effort it makes to transform into a greener company will be done with at least one eye on the oil price. As Sasol explains: “You have to make sure you’ve got the means to execute the road map. If the oil price tomorrow drops to $50 and remains there for five years, we are not sustainable to weather that storm.” 

Then there are the black swan events, such as the war in Ukraine, which caused European gas prices to spike. “All our energy costs in Europe shot through the roof; we had to cut back operations to minimise costs,” says Rossouw.

The chemical equation

For years, analysts advised people to buy Sasol shares on the basis that this provided an option on the oil price. But actually, that isn’t entirely true. 

Thanks to the Fischer-Tropsch technology on which the company was built, when the chemical reaction takes place at Secunda, it produces 40% chemicals and 60% fuel.

Last year, for example, this meant Sasol’s chemical arm made 55% of all its revenue and 74% of its earnings (a contribution of R15.9bn). Still, a highly depressed worldwide market is likely to cap profit from the chemicals division for the foreseeable future.

“This is the worst trough that we’ve experienced in the past 20 years,” says Grobler.

That’s largely because chemicals demand is spurred by global GDP, but as many countries are struggling to produce decent growth in a world of high interest rates, consumers have throttled back demand.

The other factor is China’s overinvestment in its own polyethylenes market. “China’s economic sense is different — you’ll never understand it,” says Grobler, “so to run a plant not to make money can happen.”

China’s answer is to export the excess. “We’ve seen products coming to the markets where we compete that we’ve never seen in the past 20 years.” It means a recovery is only likely next year, forecasts Sasol.

Yet as Grobler points out, if it wasn’t for the chemical market in the Covid period, Sasol would no longer exist. “At some stage there was no fuel consumption, no jets were landing at OR Tambo, we had to throttle back our operations and it was the chemicals business that carried us through.”

In this sense, a portfolio split between chemicals and energy can insulate you from a complete collapse in one or the other.

You can see why Obsidian’s Simpson describes Sasol as a “frustrating investment”, even if the stock looks to be ridiculously cheap, trading on a p:e of just 3 — staggeringly low, in a market where anything below 10 appears, on face value, to be screaming value.

“Yes, it’s cheap,” says Simpson. “But bear in mind that any pure coal mine in the world that is listed is on a 1-2 p:e rating. So, you’re practically giving these assets away because [pure coal mines] are swear words in the world now.” 

Henkel, for one, is prepared to back Sasol at its current low share price. He believes the share price is based on an oil price of $45 — far below the $74 at which oil trades today — and a rand at R18.70/$.

“You look at that and say: even if I don’t like the chemicals business, an oil price of $45 a barrel is too low. We certainly think so. For us, the current share price is significantly cheap and in order to get the current share price, we simply need to ask ourselves if a $45 oil price is appropriate? And we would say no.” 

Lastly, says Henkel, “for a long time, Sasol has traded in line with the rand oil price, but that relationship broke down in June 2022 and now it’s half [the value of that] relationship”. 

Perhaps that’s because Sasol no longer has the captive audience of asset managers it once did. Anchor’s Tsatsi points out that local investment managers have been able to significantly increase their offshore holdings thanks to changes made to retirement fund regulations. 

“It meant asset managers don’t just have to go to Sasol if they want exposure to chemicals or energy. The world is a very big place and there are so many other opportunities in that space, such as in the US and EU.” 

But, he says, “if the chemicals and energy markets start running, I suspect that South African asset managers will still turn to Sasol.”

‘An extraordinarily difficult task’

If the share price does recover, Grobler won’t be there to reap the acclaim: he hands over the reins to Sasol insider Simon Baloyi in April, and leaves in December. 

If it seems like a whistle-stop tenure, it is. Grobler has been CEO only since November 2019, but he says that after 41 years with the company — he won a Sasol bursary to study engineering at the University of Pretoria — he wasn’t prepared for another five-year shift. And he has passed Sasol’s mandatory retirement age of 60.

Still, he views his time at the company as “impactful”. 

“Terrifying” is another way of putting it: Grobler was brought in to sort out the mess at Lake Charles, where costs had blown out.

Then Covid hit — and Sasol shares plunged to below R30, an extraordinary collapse as the market panicked that the company would be torpedoed by the debt taken on to build Lake Charles. “We were sinking at the speed of light and we started to live off the credit card. So we really had to look deep to secure the balance sheet,” says Grobler.

For the year to June 2020, Sasol produced turnover of R190.3bn but, thanks to a R110bn impairment charge — mainly against Lake Charles — it clocked up a full-year loss of R117.4bn, or R147.45 a share. 

That’s the sort of loss you’d expect to see in a state-owned enterprise like Transnet — not a steady company such as Sasol.

But after selling off half of Lake Charles' base chemical units and slashing the dividend, Sasol hauled itself back into the black, producing headline earnings of R68.54 a share by June 2022, and paying a dividend of R14.70. And it managed to do all of this without having to go to market to raise capital in a rights offer, as many had feared. 

Given where it was, that’s some achievement. But on the share price alone, you’d conclude that Grobler’s tenure hasn’t been especially successful: during his time in office, the share price has sunk 43%.

This, you’d imagine, accounts for some of the anger at last week’s AGM. 

Nor are critics happy that Grobler won’t be accountable for the climate plans put in place on his watch — something Davies describes as “hugely problematic”.

“There are no short-term targets against which the executives who have put the transition plan in place can be held accountable. Simon Baloyi is going to be left with this extraordinarily difficult task,” she says.

And every year in which Sasol’s targets aren’t met, there will be major implications for the rest of the economy — including the pension funds that are heavily invested in Sasol. 

“They really are a systemic challenge,” says Davies. “While Sasol focuses entirely on the value it creates — like jobs and taxes — no-one ever calculates the damage it causes: how much are they costing the economy? That is not going to go away and we as taxpayers are going to be dealing with it for decades in the future.”