Sasol: investors dump portfolio stalwart
Sasol’s costly Lake Charles project has battered its shares to 10-year lows, but a rights offer is not on the cards – yet
To say Sasol bit off more than it can chew in Louisiana would be a gross understatement.
But to its critics, the Lake Charles Chemicals Project (LCCP) fiasco is the latest proof of Sasol’s woeful track record in mega-projects — and yet another indicator that local portfolio managers should reconsider their attachment to the company.
In its latest market upset, Sasol delayed the release of its final results to next month, as an independent review of the project had found "possible control weaknesses".
That’s certainly a quaintly restrained view of its multibillion-dollar millstone, whose cost has ballooned 45% from initial estimates of $8.9bn in 2014 to $12.9bn, while the ethane cracker — the heart of the venture — has yet to reach beneficial operation.
Its decision to delay the results hammered its shares to below R270, their weakest level since February 2010.
Embarrassingly for Sasol, another ethane cracker built right next to its LCCP was completed in half the time and at a quarter of the cost.
In May, South Korea’s Lotte Chemical opened its $3bn plant, three years after breaking ground. The facility will produce 1Mt ethylene and 700,000t ethylene glycol. Sasol’s facility, once operational, is expected to produce 900,000t ethylene and 400,000t ethylene glycol.
The problem is that Sasol’s continued troubles have an effect on the pensions of millions of South Africans.
Around 33% of its ordinary shares are owned by local unit trusts, and more than 24% is held by pension and provident funds.
RECM chair Piet Viljoen says Sasol is widely owned, though "not because of how well the company has done. It’s got more to do with its rand hedge characteristics. Historically it has acted as one, as a sort of safe haven."
But that’s changing.
Poor management over the past 10 years has resulted in Sasol repeatedly investing large sums in a series of marginal projects that don’t add value to the business and have progressively weakened its investment case.
"Despite it being a proven rand hedge, the business now is so weak it may override the rand hedge characteristics," says Viljoen.
The problem is that Sasol and BHP were once the only real way for local investors to get exposure to the oil market — and hedge against a rising oil price, and weakening rand, both of which have historically benefited Sasol.
Wade Napier, diversified resources analyst at Avior Capital Markets, says: "As a fund manager, if you ignore Sasol, you’re ignoring its diversification benefits."
But the Lake Charles venture has driven up Sasol’s debt, 85% of which is denominated in US dollars. Net debt to earnings before interest, tax, depreciation and amortisation has risen to 2.17 times, exceeding Sasol’s target of two times earnings.
Cutting the debt is now key, though Viljoen thinks there is some way to go before a rights issue is necessary.
Napier agrees. "Assuming an impairment is made, Sasol’s gearing would increase. However, we don’t expect Sasol to require a rights issue since the group would likely first look to cut its dividend and sell noncore assets to bolster its cash position. If those avenues prove unsuccessful and macroeconomic conditions deteriorate further, only then would Sasol face a rights issue in our view."
While mega-projects do have a tendency to run over time and budget, Sasol has extensive form in this regard.
Abdul Davids, head of research at Kagiso Asset Management, notes how Sasol’s Oryx gas-to-liquids (GTL) plant in Qatar was over budget and way behind schedule. He describes the company’s Escravos GTL plant in Nigeria as an "unmitigated disaster". There, costs rose from $1.9bn in 2005 to $10bn in 2009. Sasol, which provided the technology for the project, was eventually forced to sell down its stake to 10%.
Shareholders were well aware of Sasol’s poor track record in completing large projects. So Sasol undertook to de-risk its LCCP capital expenditure and timeframes by putting in place a series of checks and balances in addition to developing the project as a turnkey project. "Notwithstanding all these measures the project is still late," says Davids.
Viljoen argues that Sasol should never have embarked on any projects abroad. "To not invest at all, and pay out surplus cash to shareholders — that would have been a far superior strategy than building all these projects in foreign jurisdictions," he says.
In fact, he says it would be a better strategy if all local players stuck to their knitting.
"Most SA companies have this desperate need to diversify offshore. But going abroad, those ventures mostly just destroy value."
Viljoen thinks Sasol should have simply stuck to its "fantastic core business": the decades-old fuel-from-coal operations.