Stick to Existing Strengths: Sasol’s Joint CEOs Shift Strategy

Sasol released a new long-term corporate strategy on 23 November, ahead of meetings with investors in Johannesburg and New York. Although the company tried to downplay the announcement by suggesting that it was just refining its strategy, it contains several major shifts. Joint CEOs Bongani Nqwababa and Stephen Cornell have maintained continuity since they succeeded David Constable in mid-2016, but the revised strategy – promoting “value-based growth” – now signals a new direction under their leadership. Among the more significant strategic changes are the shift toward high-value chemicals, an increased focus on upstream exploration and production in Mozambique and parts of West Africa, and a moratorium on new gas-to-liquid (GTL) plants.

Although still based on growth, the new strategy is seemingly counter to Nqwababa and Cornell’s initial signals of their strategic intent. At Davos in January 2017, the joint CEOs suggested that they would pursue mergers and acquisitions in a bid to rebuild Sasol’s credibility in project execution. Rather than using acquisitions to drive growth, however, the new strategy intends to build on Sasol’s current advantages in chemicals, upstream activity and liquid fuels by boosting asset performance. Sasol would consider acquisitions if IOCs put relatively small assets (between $500mn and $1bn) up for sale, but only after 2022.

Sasol has now completed reviews on more than half of its global assets, and specific improvements have been planned for the majority of assets that it will retain. Among Sasol’s “non-core” assets that it intends to divest is a shale gas project in Canada (in partnership with Progress Energy), which has a book value of around $510mn. Moreover, another $500mn of assets could be readied for sale as new focus is brought to the company’s portfolio.

Sasol also announced that it will not proceed with any further greenfield GTL plants, including its planned $14bn facility at Lake George, Louisiana. This is due to the “volatile external environment and a structural shift to a low oil price environment.” Indeed, the Lake Charles GTL investment decision had been delayed in 2015 in response to the decline in the price of oil.

Nqwababa and Cornell’s assertions regarding Sasol’s delivery track record were met with skepticism from investors, especially given the announcement that an additional $130mn is required for the ethane cracker project at Lake Charles (due to Hurricane Harvey). The Lake Charles Chemical Project’s budget was increased in August 2016 from $8.9bn to over $11bn. Investors have thus welcomed the CEOs’ renewed focus on discipline in capital allocation and the announcement that Sasol will not proceed with mega-projects without partners.

Growth in Mozambique and parts of West Africa was highlighted as an opportunity for Sasol Exploration and Production to play a larger role. However, South Africa did not feature strongly in the revised strategy outside of the growth of the liquid fuels retail business. Sasol has previously had to defend its allegiance to South Africa, particularly given the increasing proportion of its business in international markets. Sasol has indicated that it will consider separating out its chemicals business (which now accounts for half of the company’s profits) once the Lake Charles Chemicals Project is completed, but this is not imminent. Meanwhile, Sasol will not make additional investments in crude refining capacity, due to the changing fuel specifications in South Africa and a lack of competitive advantage outside of its existing capacity at Secunda.