JOHANNESBURG - It was a relief to see Sasol’s results last week (at last!). It was an even more significant relief to see no further cost overruns at its troubled Lake Charles Chemicals Project (LCCP) in the US. Sasol also released the outcome of the independent review into the cost and time overruns of LCCP, and there was no further bad news.
This, together with the announcement of joint chief executives Bongani Nqwababa and Stephen Cornell departing, was very well received by the market. The independent review found no specific wrongdoing by Sasol’s corporate leadership, but the two chief executives agreed to step down in recognition that some of the problems occurred under their watch.
The review found that the issues mainly related to a group of individuals in the management team who fostered a “culture of fear”, which prevented information from flowing up the management chain. Various governance shortcomings within the project further contributed to the issues. Three senior vice-presidents with roles in the project left, while disciplinary action had been initiated against the executive vice-president previously in charge of the project.
The LCCP consists of a world-scale 1.5-million-ton-per-year ethane cracker, and six downstream chemical units and is currently under construction near Lake Charles, Louisiana, in the US, adjacent to Sasol’s existing chemical operations.
Once commissioned, this world-scale petrochemicals complex will roughly triple Sasol’s chemical production capacity in the US.
The deadlines for three remaining units have now been pushed out about six months, and are expected to come online in the second half of 2020.
Investors love seeing that action is taken against wrongdoing, and when management is axed when they do not take care of shareholders interests.
The immediate reaction was a gain in the share price of 12percent. The more good news was that there were no restatements to earnings, financial position or cash flow.
Investors in Sasol can probably sleep well, going forward. My best guess is that new chief executive Fleetwood Grobler will take enormous care managing costs in the latest Lake Charles projections, and eyes will now be on the ramp-up of the ethane cracker. Debt is high and the balance sheet in a delicate state, but if prices of oil and chemicals are steady at the current levels, the balance sheet will start looking in better health in a year. Capital expenditure will just about halve over the next two years, which will further reduce pressure.
If prices increase, the rand stays weak, and management pulls together all the reins, it might just be the perfect investment. Whether it will go back to the peak above R600 back in 2014 is another question. Back then, the oil price was above $100 (R1500) a barrel, which will not necessarily happen again. After the oil prices’ dramatic drop late in 2014, the Sasol share price was in a trading range between R375 and R450 for many years.
By September 2018 the share price reached R550 and confidence was healthy for Sasol’s Louisiana project to at least double earnings. Since then, the share price dropped to R250 and is only now showing signs of recovery.
Although Sasol is cheap in relation to its historical valuation levels, it is not risk-free. There is increased attention to environmental, social and governance matters. The market might also decide that the poor capital allocation justifies a lower rating going forward.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Sasol shares are currently held personally, and on behalf of clients.
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