Energy and chemicals group Sasol expects its capital expenditure (capex) to increase to R75-billion in 2017 and its balance sheet gearing to between 25% and 35%, following the upward revision to the budget of the Lake Charles Chemicals Project (LCCP), in the US, to $11-billion, from an initial forecast of $8.9-billion.

In their maiden results presentation, joint presidents and CEOs Bongani Nqwababa and Stephen Cornell indicated that Sasol’s 2017 capex estimate was an increase of R2-billion on previous guidance, and largely attributable to the increased LCCP capital estimate and the impact of the weakening rand. Capex for 2018 is forecast to be R60-billion.

The group’s gearing increased to 14.6% in 2016, from an ungeared 2.8% position in the prior year. However, it has remained below the previous market guidance of 20% to 40%, owing to a stronger than anticipated rand:US dollar exchange rate and delayed capex on a number of projects, including the LCCP.

The group expects capex on the LCCP to be $3.4-billion during 2017 and $2.2-billion in 2018.

The Louisiana project is 50% complete and Sasol reports that it is “fully funded”, with bank facilities of $4-billion in place and the balance arising from “corporate”, including the use of $2.5-billion in offshore cash holdings, as well as other dollar-based facilities.

Nqwababa stresses that no South African-generated cash be used to fund the US project. “This project is a US-dollar project, being funded by US dollars offshore. There are no rands being repatriated to fund the project.”

However, to manage the impact of price volatility and the lower-for-longer oil price environment, the Sasol board has temporarily lifted the internal gearing ceiling to 44% until the end of the 2018 financial year.

Cornell is confident, however, that the ceiling will not be breached, telling Engineering News that the revised LCCP budget includes sufficient contingency, while action has been taken to ensure that over 80% of total output from the project will be in beneficial operation by early 2019.

He stresses, too, that the decline in gearing should be equally rapid once LCCP enters production. “When LCCP finishes, the estimate is it will spin off $1.4-billion to $1.5-billion a year,” Cornell explains, adding that the group is, thus, already assessing future investment opportunities.

Next Big Thing?

Already on the radar are potential additional investments in Mozambique, including a 400 MW gas-to-power development, as well as South Africa’s liquefied natural gas importation and power generation plans. However, Cornell says there are also significant chemicals opportunities across the globe, which will also be considered.

Nqwababa reports that Sasol is closely monitoring both fiscal and political developments in Mozambique, where the company already has significant investments and where a further $1.4-billion is currently being invested to extend gas resources, add processing capacity and extend the pipeline network into South Africa. He says he is hopeful that issues will be resolved on the political front, while there is “awareness and willingness” to deal with the financial stresses.

Sasol has also reported some progress in its ongoing efforts to deal with the fallout from the slump in North American gas prices since its 2011 investment into a large Canadian shale gas resource. The company has raised a total impairment of $1.7-billion against the asset, with a further $880-million write-down in 2016.

It has also bought out, for C$380-million, a contractual obligation to carry its partner, Progress Energy, in the development of the field. There now is an alignment of interests between Sasol and Progress Energy that had hitherto been absent, with Sasol having been keen to hold back on field development until gas prices recovered and Progress was incentivised, through the contract, to continue drilling. “We have bought that ‘carry’ out and now both of us want minimum development – we were at four-rig development 18 months ago and we are down to one rig now,” Cornell explains.

For the 2016 financial year, Sasol reported a 17% drop in headline earnings per share to R41.40, despite a 25% weakening in the rand oil price during the period.

The result was supported by record production volumes at Secunda Synfuels Operations, in South Africa, as well as savings achieved through its Business Performance Enhancement Programme (BPEP) and its Response Plan (RP) to the low oil price.

Through the BPEP, Sasol aims to achieve sustainable savings of R5.4-billion by the end of the 2018 financial year against its 2012 base of R40-billion. In 2016, it achieved sustainable cost savings of R4.5-billion, exceeding its R4.3-billion target.

The RP, meanwhile, which was implemented in 2015, realised R28-billion in cash savings for 2016, exceeding the upper end of Sasol’s target of R16-billion. The aim of the RP, which is designed to shore up the group’s position in the context of a $40/bl oil price environment, will reduce the overall cost base by a further R2.5-billion.

“Therefore, R7.9-billion should effectively come out of the cost base,” CFO Paul Victor explains.

He adds that this should also enable the company to sustain its dividend, while pressing ahead with its growth projects. Sasol reported a second-half dividend of R9.10 a share, bringing its dividend for the year to R14.80 a share, well down on the R18.50 a share announced in 2015.

Meanwhile, Nqwababa and Cornell insist that the joint CEO model adopted by Sasol is “working”, having been refined during the six-month handover period from David Constable.

Cornell says he and Nqwababa are “jointly and severally liable, which means we must both be engaged in all aspects of what is happening in the company”. In other words, responsibilities have not been divided by geography or business units.

Nqwababa quips that, besides having clarified roles and responsibilities, their “manageable egos” have also helped smooth the process. “It’s early days yet, but we are working very well together – very well, indeed.”

Both individuals are also firm that there will be no further changes to the operating model, with the group only now emerging from a far-reaching restructuring process that resulted in a number of individuals leaving the organisation over the past few years. As things stand, there are currently 30 000 Sasol employees, the majority of whom are still located within the South African operations.