Energy and chemicals group Sasol, which announced another large increase in the capital cost of its Lake Charles Chemicals Project (LCCP) being built in the US, will accelerate its $2-billion noncore asset disposal programme and will used the proceeds to deleverage its balance sheet.
Joint president and CEO Bongani Nqwababa said on Wednesday that the JSE-listed group was “extremely disappointed” in having to confirm a further upward revision to the capital cost of the LCCP project, which is now expected to be between $12.6-billion and $12.9-billion.
In 2014, the group said the Louisiana project would cost $8.9-billion to build, but there have been several cost revisions since that date, the latest being in February when Sasol provided a cost-to-completion range of between $11.6-billion and $11.8-billion.
The newest revision increases the project’s price tag by between $1-billion and $1.3-billion, with the higher figure including a contingency of $300-million.
Joint president and CEO Stephen Cornell refused to divulge the identity of the assets earmarked for disposal, indicating only that they had been identified during an asset review process initiated a year ago.
The group indicated previously that the review covered 100 assets or asset groupings and that it expected to realise more than $1-billion from the disposal programme.
Nqwababa said the disposals would be aligned with the group’s updated strategy, which was geared towards increasing its specialty chemicals footprint, consolidating its position in the gas and oil markets of Mozambique and West Africa respectively and growing its fuel retail network in South Africa.
Under the strategy, Sasol would no longer pursue new oil refineries, coal- and gas-to-liquids projects, or seek to grow its base chemicals portfolio.
Once the LCCP was completed Sasol's earnings mix between energy and chemicals would move in favour of chemicals, which would account for 70% of revenue.
Sasol would be engaging with various banks and transaction advisers to ensure that the assets would be exposed to a “wide universe” of potential buyers.
Cornell stressed that Sasol was not in a position whereby it was being forced to sell assets and the company would, thus, only enter into transactions where value could be secured.
Besides the $300-million for contingencies, Sasol attributed the latest increase in the LCCP capital estimate to a $530-million adjustment arising directly from "oversights" in the way the project team calculated the February estimate, as well as another $470-million arising for additional events and remaining work.
One of the oversights in the February calculation included a $230-million duplication of investment allowances provided for the LCCP by the State of Louisiana.
A number of changes had been made to the management of the LCCP project and accountability had since been reassigned to the executive vice president of chemicals, Fleetwood Grobler.
Sasol also announced a downward revision – from 7.5% to between 6% and 6.5% – in LCCP’s expected internal rate of return, which was attributed partly to the increase in the cost of the project and partly to a weakening in the chemicals market outlook.
The group’s gearing would also remain elevated for between 18 and 24 months, with peak gearing of close to 50% anticipated during the 2019 financial year. Nevertheless, Sasol insisted that its balance sheet was “sufficiently robust” to absorb the increased cost of the project.
“Over this period, the anticipated contribution from the LCCP has been negatively impacted by a change in the short- and medium-term pricing outlook,” Sasol said in a statement, noting that the earnings before interest, tax, depreciation and amortisation for financial year 2022 of $1.3-billion have been revised to about $1-billion.
Sasol’s share price plummeted by over 13%, from R389.20 to R371.26, directly after the statement was released to shareholders, confirming the surge in the capital estimate for the LCCP project.