Banele Ginindza
INVESTORS yesterday cheered Sasol’s decision to delay development of its $14 billion (R161bn) gas-to-liquids (GTL) plant in Louisiana in the US amid the falling oil price, which has declined over 50 percent in the last six months.
The announcement caused Sasol’s shares to gain as much as 2.7 percent to R427.54. However, Sasol’s share closed 41c down at R416.16.
“The market picked up quite nicely after the announcement which indicates that this was a relief for most shareholders,” David Shapiro of Sasfin Securities said.
Abdul Davids, the head of research at Kagiso Asset Management in Cape Town, said: “The decision to delay the final investment decision should be commended.”
While the GTL plant would not be viable at current oil prices, “the ethane cracker would still be viable albeit with much lower returns”, he said.
The Industrial Development Corporation (IDC) has a 7.9 percent stake in Sasol.
Mandla Mpangase, an IDC spokesman, said it expected Sasol management and the board to protect shareholder interests and respond to changes in the economic environment.
The petroleum giant said it needed to make at least R4bn in savings by 2016 and would focus its cost savings on capital portfolio phasing and reductions, capital restructuring, working capital improvements, margin enhancement and further fixed cost reductions.
The facility, to be located next to an $8bn ethane cracker in Lake Charles, Louisiana, was estimated in 2013 to cost $14bn.
The cracker that converts ethane into ethylene used to make chemicals that go into antifreeze and water bottles, was approved in October and the final decision on the GTL plant was expected to follow within two years.
However, analysts wondered if the knee-jerk reaction was too little, too late as about R154bn had been wiped off the company’s market value since the Brent crude price peaked at $115.71 a barrel in June.
“At these prices, I think it will severely impact Sasol’s earnings in the next year if the price does not improve; it will take profits down considerably and challenge dividends,” Shapiro said.
He added it was all speculation at this stage, which was a problem. No one had foreseen a price of $40 a barrel when the avalanche started.
Sasol, which is in a closed period, is due to provide more detail at its interim results announcement on March 9.
Alex Anderson, a Sasol spokesman, said the petroleum giant had a project team crunching the numbers on current and new projects, and was evaluating what to prioritise to cope with the low price environment.
“At our full year results for the 2014 financial year, we estimated that a 10c change in the annual average rand/US dollar exchange rate and a $1 change in the crude oil price will affect our profit from global operations by approximately R860 million and R750m, respectively. We update this sensitivity at our interim results on March 9,” he said.
The fall in the oil price is causing oil producers to revisit their expansion and investment plans.
Some plans have not survived the decline with Qatar Petroleum and Royal Dutch Shell last week saying they have ended plans for a $6.5bn petrochemical plant in the Middle East nation. – With additional reporting by Bloomberg