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- Sasol hopes it will emerge from its slump and re-claim its spot as a top blue chip firm.
- The company’s planned rights issue, estimated around $2 billion, is still on the table.
- It expects units at the US Lake Charles Chemicals project, hit by hurricanes, to be back online by end October.
From being crippled by difficult market conditions to suffering the brunt of natural disasters in the US, Sasol’s production levels in the first quarter of the 2021 financial year reflected the mixed fortunes the company has experienced in the recent past.
The three-month operating period to the end of September saw a dip in production levels in liquid fuel operations, mining and the US chemicals unit compared to the corresponding period, when the extent of the cost overruns at the Lake Charles Chemicals Project came to light, forcing the company, in August 2019, to delay the announcement of its annual financial statement.
The financial toll of the $13 billion investment, which has repeatedly been affected by delays including hurricanes, is one of the key contributors to the firm’s financial challenges, which prompted it to sell 50% of the base chemicals unit at Lake Charles to LyondellBasell for $2 billion.
The Natref refinery had to shut down in April due to slow demand in petrol and jet fuel during the lockdown. The facility, which is jointly managed with Total SA, saw an 18% decline in production in the first quarter, as lockdown hit demand for petrol and jet fuel to unprecedented levels due to the travel restrictions and a ban on air travel.
The refinery facility is expected to lift crude rates later in the financial year as lockdown restrictions are eased.
The current operational and financial challenges faced by the 70-year-old firm are certain to keep CEO Fleetwood Grobler on his toes since he took over as leader, following the resignation of joint executives Bongani Nqwababa and Stephen Russell Cornell in 2019 over the Lake Charles debacle.
Grobler is driving structural changes at the company, which has been offloading its premium assets in a bid to plug its R189.7 billion debt hole. He is is optimistic that the company will emerge from the financial doldrums a stronger business.
He said by the time the company completes its restructure plan by the financial 2025, Sasol would have restored its blue chip share status and a dividend paying entity with streamlined assets.
“I believe the company would be a new force to be reckoned with compared to competitors….and be a viable and competitive investment destination,” said Grobler.
But the company has a mountain to climb before getting back to its former glory, given its debt challenge and its unpredictable operating environment, which is heavily exposed to volatile commodity prices and environmental headwinds.
After being battered by Hurricane Laura, which forced the Lake Charles complex to close due to damage caused by the storm, production at the chemicals facility was set to take a knock in the last three three months.
Laura was followed by Hurricane Delta, which struck on October 9 and hit power supply to the plant, disrupting activity, with sales volumes 28% lower.
The project, initially meant to strengthen Sasol’s position as a global chemicals company, has added more woes to the company than returns, starting with its development costs, which rocketed from an estimated $8.1 billion, when it was approved in 2014, to $12.9 billion.
“Our preliminary assessments indicate that no further damage occurred as a result of Hurricane Delta, and a coordinated start-up of the complex is underway. All units that were operating prior to Hurricane Laura are expected to return to operation by the end of October 2020,” the company said on Thursday, as it gave an update on the development.
Focus on better returns
Commenting on the climate risks that have ravaged Sasol in recent times and the prospects of the Lake Charles, Meryl Pick, Head of Equities Research at Old Mutual Investment Group, said it was unlikely that the Chemicals Project would deliver the attractive returns envisioned when the project was approved in 2014.
“This is due to the huge cost overruns during the build phase, a deteriorating global growth outlook that’s weighing on chemicals prices, and rising environmental pressure on the plastics industry,” said Pick.
Pick added that the decision to embark on a joint stake in the chemicals project alleviates some downward pressure on returns for the group going forward.
“Sasol will focus its effort on generating better returns from the niche performance chemicals operations at Lake Charles, of which they will remain sole owners,” she said.
CFO Paul Victor said the rights issue was a decision that the company was still considering, stating that by early December it would be possible to form an opinion of where the company is in terms of the rights issue which was estimated to be around $2bn.
“We would be probably be more on the lower end of the range provided the market is up to the high ticket size. It is still in the making and we are making good progress,” said Victor.
The sale of a stake in Lake Charles was widely seen as offering the company a space to manoeuvre around its R189.7 billion mountain of debt.
Sasol shares were down 2% on Thursday afternoon at R98.98.