Sasol’s bold leap into the US through its Lake Charles Chemicals Project is facing more cost blowouts, with management revising the project’s budget upwards for the third time since 2014.
This created further shareholder angst as the company’s share price finished 13% lower on Wednesday, wiping R32 billion from its market capitalisation.
The southern Louisiana Lake Charles Chemicals Project will incur an additional $1 billion – bringing the project’s cost to between $12.6 billion and $12.9 billion. The latest revision to the budget is much pricier than the initial $8.9 billion shareholders expected when the project started in October 2014.
Since then, Sasol shocked shareholders when it pushed up the cost by $2.1 billion to $11 billion in August 2016 – and by another $130 million to $11.13 billion in November 2017.
The steep budget increase is making analysts and shareholders back in SA unhappy as they were already nervous about the giant scale of the project, which is expected to triple Sasol’s chemical production in the US.
Shareholder activist Theo Botha insists that Sasol directors – including joint CEOs Bongani Nqwababa and Steve Cornell – should “take responsibility and fall on their sword” for the Lake Charles cost overruns because they were both part of Sasol when their predecessor David Constable launched the ambitious project.
Clawback of bonuses
“Sasol directors cannot continue to rack up [the] costs of Lake Charles and continue to be awarded bonuses. Shareholders should ask for a total clawback of bonuses especially when Sasol directors do not meet their key performance indicators,” Botha told Moneyweb.
He wants Sasol to put the latest $1 billion cost overrun to a shareholder vote for approval – something he says was not done with previous cost increases.
“Since 2014, I have been asking Sasol to implement a structure for shareholders to approve these cost overruns. There aren’t enough checks and balances to hold companies like Sasol [to account] when big projects fail.”
The cost overruns, Botha added, have impacted shareholders’ internal rate of return. Underscoring this is that the revised Lake Charles cost of up to $12.9 billion (R185 billion) is about 78% of Sasol’s market capitalisation (R238 billion at the time of writing).
It’s a huge gamble for Sasol, given that the price tag for Lake Charles is also roughly six times its R30.5 billion operating profit for 2018.
The revised Lake Charles cost includes a $300 million contingency, which one analyst said was “adequate” to complete the project without further cost increases. But the key risk remains labour productivity and management of the construction schedules, the analyst added.
Reasons for cost blowout
Sasol previously blamed cost overruns on several factors, including extreme weather events – which are arguably out of its control – such as hurricanes that made landfall on the US Gulf Coast, which put the skids on Lake Charles’s productivity levels.
This time, Sasol attributed cost overruns to lack of oversight and control of the project, factors that were within the company’s power.
A review of the project indicated that it faced oversights such as overlooked contracts, procurement back charges, adjustments for potential insurance claims, and repairs that needed to be done.
‘We take accountability’
“We are extremely disappointed with the increase in the project’s capital costs,” said Nqwababa. “We take accountability and we are confident that the revised plan will be delivered.”
Lake Charles, like Eskom, is too big to fail. It comprises an ethane cracker plus a downstream chemical plant that will generate ethylene at a rate of 1.5 million tons per year. The project, which at the end of March 2019 was 96% completed, is expected to boost the portion of chemicals in Sasol’s sales mix to 70%.
Nqwababa said Sasol’s balance sheet is “robust enough” to absorb the Lake Charles cost increases and that the company “remains confident in the outlook for the project”.
Nqwababa’s hubris is based on Sasol’s capital allocation strategy, which includes the reduction of its balance sheet gearing towards 30% (compared with 48.9% during the six months to December 2018). It also plans to sell assets worth more than $1 billion across its portfolio to reduce its debt load.
Cornell didn’t elaborate on which specific assets will be up for sale, only reiterating that Sasol will restrict its capital allocation to exploration opportunities in Mozambique and selected West African countries and cease further investments in greenfields gas-to-liquids plants.