Sasol’s latest quarterly production update had much more to cover than usual, with management having to explain the impact of not just one but two hurricanes that hit the US coast only weeks apart.
The hurricanes shut down its Lake Charles Chemical Project (LCCP) plant for weeks on end just when the plant was restarting operations after the shutdown caused by the Covid-19 pandemic.
Management also had to answer questions about the pending sale of parts of the LCCP to LyondellBasell Industries during a webcast to discuss Sasol’s performance during the last three months.
CEO Fleetwood Grobler and CFO Paul Victor still trotted out a positive message, both basically telling shareholders that all the Sasol divisions are recovering well from the Covid-19 shutdown, while chemical and energy prices are also recovering.
“Oil prices have recovered thanks to an increase in demand and lower production due to Opec cuts,” says Grobler, “while chemical prices have increased on the back of the recovery in China.”
He also maintains that an overall increase in the production costs of chemicals has supported chemical prices.
“I believe we have seen the turning point in the chemicals market,” he told his audience of fund managers and analysts.
It is an open question whether shareholders agree. It looks as if the share price is still stuck in a downward trend, falling below R100 this week.
Investors don’t like to be reminded that the share was still above R170 in June and around R300 at the beginning of year.
As expected, the production figures for the first quarter of the new financial year do not look good.
In essence, only the SA synfuels division based in Secunda performed well in comparison to the first quarter of the 2020 financial year, but even this good performance should come with a little footnote.
Production of all the chemical products increased at the Secunda plant, while the production of synthetic fuel was on par with that of the same three months a year ago, and obviously much better than during the previous quarter of lockdown.
But the figures hide the fact that Sasol usually shuts down its Secunda plant for annual maintenance during the first quarter of the financial year, which it did not do this year. This year, the maintenance was done earlier during the Covid-19 shutdown when demand for fuel fell dramatically, and not according to the normal maintenance schedule.
Thus, the footnote should read that the figures for the quarter ending September 2020 compare a plant running at full production with one that was shut for maintenance for a few weeks in the corresponding 2019 quarter.
The Natref plant reported a decline of 18% in overall production compared to a year ago.
Fuel demand down
“Natref production for the first quarter was, as expected, 18% lower as a result of the decrease in fuel demand, particularly the lower jet fuel demand in SA due to the Covid-19 lockdown,” according to the quarterly report.
“The lower demand for fuel is still hampering Natref. Operating at a lower rate is a huge constraint,” says Grobler.
He said he could not venture an opinion of when demand for jet fuel in particular will recover.
Figures show that most of Sasol’s businesses performed worse than a year ago. Its SA mining operations suffered due to the ongoing impact of Covid-19 on productivity. Productivity was some 2% lower, according to Sasol’s measurement of productivity, resulting in a 7% decrease in total production during the quarter.
The lower production forced Sasol to purchase coal from other producers to ensure sufficient supply to keep its synfuels plants running.
In addition, management says Sasol is building up a larger than usual stockpile of coal to prepare for the risk of a second wave of Covid-19 that might impact mining operations again.
While the production of natural gas increased somewhat in Mozambique, the increase was offset by a reduction in Canada. Gas production in Canada is declining as the gas wells are being depleted, a “trend to continue for the financial year”.
A welcome figure is that crude oil production increased sharply in Gabon, thanks to new oil wells coming into production.
And then there is LCCP. Producing base chemicals and performance chemicals, the huge plant in the US showed improvement in the production of some products, but is struggling in others compared to a year ago.
Laura and Delta
“Our Lake Charles production was impacted by Hurricane Laura, one of the strongest recorded hurricanes to impact the Gulf Coast. The hurricane made landfall on 27 August 2020 near LCCP in Southwest Louisiana.
“Post Hurricane Laura, Sasol made significant progress towards readying the LCCP facilities for restart. The restart had to be suspended as a precautionary measure due to Hurricane Delta, which made landfall near Lake Charles on 9 October 2020,” says management.
“All units that were operating prior to Hurricane Laura are expected to return to operation by the end of October 2020.”
Unfortunately, the damage was done.
While the production of base chemicals in the US increased sharply (from a low base), it was still somewhat lower than expected and prices were also lower due to weak demand.
Performance chemicals sales volumes dropped 11% in the quarter under review, due to Covid-19 related restrictions which impacted many of Sasol’ key markets, says management. “This was exacerbated by an unplanned outage after Hurricane Laura interrupted the electrical supply.”
The net result of the hurricanes and all the figures is that LCCP is expected to produce earnings before interest, tax, depreciation and amortisation of between $50 million and $120 million for the current financial year.
Financial director Victor admits it is a wide range, listing a long list of reasons for the uncertainty. One of the reasons is the uncertain outcome of an insurance claim for damage caused by the hurricanes.
He also lists the outcome of the US election, global economic recovery and the ongoing Covid-19 pandemic as factors to consider. However, he seems confident that the figure will end up towards the higher end of the range.
A ‘good story’ to come
Victor says Sasol is “making good and steady progress” to strengthen its balance sheet and promises a “good story to share with you” when Sasol presents an investor update at the beginning of December – only weeks away.
He reiterated that the directors have not decided on the proposition of a rights issue as yet, referring to the possibility of a R2 billion right issue that Sasol alluded to earlier.
“The decision is still in play. We are doing our darnedest to avoid a rights issue.”
Victor says the decision whether to go ahead with a rights issue does not hinge on the current (low) share price.
Shareholders might disagree, while called on to decide whether to approve the sale of part of the LCCP complex to LyondellBasell Industries. A circular with the details of the transaction was published and shareholders will need to vote on the proposal within weeks.
What are the options?
Sell part of the future income stream of LCCP to someone else, or rather put up the money by buying more shares in a rights issue?