US project cost increases, delays knock Sasol shares

JOHANNESBURG –Shares in Sasol have taken a hammering after the company reported that the capital costs at its Lake Charles Chemicals Project (LCCP) in Louisiana in the US had increased to between $11.6billion (R157.52bn) and $11.8bn, and the start-up would be delayed by up to five months.

108216284 - US project cost increases, delays knock Sasol shares
SASOL shares fell 6.5 percent on Friday, wiping R16.1 billion off its market capitalisation. Bloomberg

The capital cost of the project has increased from its previous guidance of $11.3bn, and the difference between the upper and lower end of the range of the new estimated capital cost relates to a contingency and weather provision of $200million.

Shares in the listed integrated energy and chemical company dropped 6.5percent on Friday to close at R384.78, knocking R16.1bn off Sasol’s market capitalisation.

Delays in the project schedule and the increased capital cost resulted in Sasol saying that the company estimated it would report an earnings before interest, tax, depreciation and amortisation (Ebitda) loss on the project of between $165m and $195m in its financial year to June this year, compared with its previous estimate of an Ebitda profit of between $110m and $160m.

However, Sasol has maintained its guidance that the LCCP would deliver a steady state Ebitda of $1.3bn in its 2022 financial year.

Sasol on Friday revised its headline earnings a share range for the six months to December slightly upwards, to between R22.97 and R23.68, compared with R17.67 in the prior period, which represents an expected increase of between 30 and 34 percent.

The company said the main reason for the increase was the impact of the half-year-end valuation adjustments that had been associated with crude-oil hedges and the closing exchange rates.

Sasol added that, despite the revised cost and completion schedule for the LCCP, the company still considered the project to be a sound strategic investment that was of significant importance to its future growth, and it would generate value for its shareholders for many years into the future.

It said the engineering and procurement activities at LCCP at end-December were substantially complete, and the construction progress was at 84percent, while its overall project completion was 94percent, with capital expenditure of $10.9bn.

The company said that the first derivative unit, linear low-density polyethylene (LLDPE), produced its first product last month and a beneficial operation was expected this month, which was about two months behind schedule.

Sasol added that utilities to support the early process units were fully operational by the end of November, and these utilities, together with the LLDPE, would comprise 40percent of the LCCP’s existing total cost.

However, Sasol said that several factors within and beyond its control during the last quarter of the last calendar year affected the completion and associated costs of the remaining units. This resulted in the overall project capital cost estimate having to be revised.

It said the factors that affected the revised cost estimate included changes of scope, a cumulative month of work being lost because of excessive rainfall in the fourth quarter of the 2018 calendar year, productivity losses exacerbated by high absenteeism around public holidays and construction rework since November last year, and schedule delays of the remaining units that would result in additional overhead costs.

Sasol stressed that its management maintained its unrelenting focus on delivering the remaining unit in line with its updated plan, and remained confident that the fundamentals of the LCCP remained intact. 

These included establishing a feedstock advantaged plant and a world-scale highly integrated facility with a diverse product slate with high margin products and world-class logistics and infrastructure.


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