Sasol’s share price surges on higher Lake Charles production
The company’s share price has been under pressure from delays and cost overruns at its Lake Charles Project in the US
In a sign that the worst of the Lake Charles fiasco may be behind it, Sasol announced improved production rates at the embattled US project causing the share price to jump 11.7%, the largest single day gain since October 28 when Sasol announced its joint-CEOs would step down.
At R305.58, Tuesday’s closing share price also marked the highest price level since September 16 when Brent crude oil experienced its sharpest price jump on record after a drone strike took out Saudi Arabian oil facilities.
Sasol extended gains on Wednesday, rising a further 7.31% to R327.22 — a five-month high.
The Lake Charles Chemicals Projects (LCCP) is set to transform the SA-born company into a large global chemicals player, but investors have been disappointed with the execution of the mega-project which has faced numerous delays and budget overruns of 45% to reach as much as $12.9bn (R186bn).
On Tuesday the company said the so-called ethane cracker, which is at the heart of the LCCP, is increasing production rates following the successful replacement of the acetylene reactor catalyst.
The cracker converts the ethane, a component of natural gas, into ethylene which is used to make a range of chemical feedstock for products such as cool drink cans and detergents.
The acetylene reactor catalyst assists in cleaning the acetylene – a combustible gas and impurity – out of the “cracked” ethylene. This means the LCCP now can produce a higher specification-grade ethylene, as it is designed to.
Although the cracker achieved beneficial operation, or passed the 72-hour operation production test run, in August 2019 it has run at approximately 50% to 60% of its full capacity due to underperformance of the plant’s acetylene removal system. Now that the catalyst has been replaced – and which was done on schedule and within budget – Sasol said the unit has started up smoothly and ethylene productions rates are around 85% to 90% of full capacity, and increasing. Sasol said the ethylene quality meets US Gulf Coast ethylene pipeline specifications.
As positive as Tuesday's market reaction was, the Sasol share still remains 36% down in the year to date, largely because of the problems at Lake Charles.
Zaid Paruk, a portfolio manager and analyst at Aeon Investment Management, said investors had been too skeptical of Sasol's ability to complete the LCCP project at the revised budget of up to $12.9bn communicated budget. This had been negatively priced into the shares up until Tuesday’s announcement which shows the project appears to be ramping up in line with its revised expectations.
Wade Napier, diversified resources analyst at Avior Capital Markets, said the market update was positive on several accounts. “The on-spec operation of LCCP’s cracker without further cost overruns should allow the complex to begin generating positive free cash flow and for Sasol to start deleveraging its balance sheet from the second half of its financial year,” he said.
Sasol said beneficial operation of its low density polyethylene unit is expected later this month while three remaining downstream units under construction that will complete the integrated LCCP site remain on cost and schedule.