Lake Charles delays, costs batter Sasol share price
Analyst warns the update is a major mark against the Sasol management’s credibility
Sasol’s share price recorded its biggest one-day drop in nearly three years after the group announced yet another delay and cost increase at its chemicals project in Louisiana.
Less than four months after telling investors that its new Lake Charles chemical plant is on track to cost $11.13bn, the company warned on Friday that it was now expected to cost between $11.6bn and $11.8bn.
The start-up of the project’s first unit was also delayed by two months.
In response, the Sasol share price closed 6.5% lower on Friday at R384.78, reflecting its biggest one-day drop since September 2017.
More than R15bn in market value was wiped out by the time trading closed. The share is down 27% over the last six months, driven largely by the decline in the oil price.
The project — an ethane cracker and derivatives complex — has already faced a number of cost overruns and delays. On inception in 2014 it was expected to cost $8.9bn and to be in operation by 2018.
Lake Charles is Sasol’s biggest project and is set to transform it from largely a fuel producer, with its main footprint in Southern Africa, to a major global chemicals player. Chemicals, used in the production of products ranging from plastics to cosmetics, are expected to contribute more than 70% to Sasol’s overall revenue once the complex is fully operational.
Sasol attributed the delays and cost overruns to a number of factors, including excessive rainfall in the December quarter, high absenteeism around public holidays and "late scope additions for the cracker as a result of incomplete engineering work not timeously identified".
The cost will be significant. Whereas Lake Charles was expected to generate earnings before interest, tax, depreciation and amortisation of between $110m and $160m in the financial year to end-June, it was now to report a loss of between $165m and $195m over the period, Sasol said.
Terence Craig, chief investment officer at Element Investment Managers, said Friday’s news was surprising because, in October 2018, Sasol had told the market the project was on track.
"Obviously it’s concerning as to whether Sasol management is 100% on top of the project," Craig said.
"Generally when you have these massive multiyear projects, they almost never start on time or are completed on budget." However, such cost overruns, especially in US dollars, are not immaterial.
Often such large projects tend to encounter large stumbling blocks as they ramped up to operation. "I would be concerned as a Sasol shareholder as to whether there will be further cost overruns," he said.
Abdul Davids, head of research at Kagiso Asset Management, said the update was a major mark against the Sasol management’s credibility.
Although some cost overruns and delays on such a large project as Lake Charles would be expected, "for Sasol this reinforces a pattern given the company’s poor track record of delivering projects on time and within budget", Davids said.
It also meant Sasol’s debt levels are now likely to remain above the company’s targeted ceiling for longer, he said.