Sasol Sees Lake Charles Project Adding Profit in Second Half

JOHANNESBURG (Capital Markets in Africa) – Sasol Ltd. said its setback-hit Louisiana chemical project should generate positive core earnings in the second half of the financial year.

The South African chemicals and fuels producer reported a 73% drop in first-half earnings per share after oil prices in rand dropped, global chemical markets softened and the company suffered delays at its Lake Charles Chemicals Project. The U.S. plant negatively impacted earnings by 2.8 billion rand ($185 million), Sasol said.

The company said it decided not to pay an interim dividend to protect and strengthen its balance sheet. Sasol’s shares fell as much as 8.4% in Johannesburg by 12:40 p.m., extending recent declines to the lowest since 2006.

The LCCP is now expected to generate positive earnings before interest, taxes, depreciation, and amortization in the second half, the company said. Construction progress was at 98% by the end of December.

Weaker chemical and refining margins emerged at “a sensitive point” for Sasol’s balance sheet, leading to the dividend cut, Thomas Wrigglesworth, an analyst at Citigroup, said in a note. The ramp-up of units at LCCP is also critical to the company’s stock.

The U.S. megaproject promised to transform Sasol by increasing chemical manufacturing alongside its fuel production operations and expanding outside of its home market. Yet the LCCP has been hit by a string of setbacks that punished Sasol’s share price. Costs have increased about 50% from original estimates at the start of the build and evidence of mismanagement at the project led to the departure of its co-chief executives in October.

LDPE Unit
Sasol said it now expects to achieve “beneficial operation” at the LCCP’s low-density polyethylene unit in the second half of the calendar year. The unit — one of two large polymers plants — was damaged by an explosion and fire on Jan. 13, when a piping support structure failed.

The incident has eroded the LCCP’s Ebitda contribution in the 2020 financial year to an expected $50 million to $100 million.

“We are disappointed by the challenges with the low-density polyethylene (LDPE) unit startup,” Sasol Chief Executive Officer Fleetwood Grobler said in the statement. “As we near the end of the project’s capital spend phase, approximately 80% of total installed output is online.”

Besides operational challenges, Sasol has faced weaker markets for its products. The chemical business was impacted negatively by a “softer macroeconomic environment” during the period, the company said.

It anticipates softer chemical prices over the next 12 to 24 months and expects structural recovery over the medium to long-term. “What is a concern for us is to closely watch the macro environment” and the impact the coronavirus epidemic will have on both oil and chemical demand,” Grobler said in an interview.

Earnings were already hit by a 9% decrease in the rand per barrel price of Brent crude and lower refining margins due to weaker demand during the period, the company said. Sasol assumed oil prices staying at $50 to $70 a barrel for its outlook projections.