South Africa's Sasol bullish on oil prices as Lake Charles completion draws closer

23 January 2018 11:50 Source:ICIS News

LONDON (ICIS)--Firmer oil prices are likely to boost Sasol's earnings in the first six months of 2018 if current levels of near $70/bbl are maintained, the South Africa-headquartered company said on Tuesday, as its $11bn Louisiana, US, cracker complex draws closer to completion.

Higher margins for refining, basic and specialty chemicals helped to drive a predicted 12-17% increase in headline earnings per share (HEPS) for the first half of Sasol’s fiscal 2018, covering the six months ending last December.

Stronger performance chemicals volumes helped to drive a projected HEPS increase to South African rand (R) 16.93-17.69 ($1.40-1.46).

Stronger performance chemicals sales helped to offset a projected 1% year on year fall in base chemicals sales during the period to 1.75m tonnes, partly due to delays at a port in South Africa and the impact of Hurricane Harvey in the US, Sasol said. Despite the slight reduction in volumes, average base chemicals prices - excluding US ethylene - during the period rose to $846/tonne compared to $764/tonne during the first half of fiscal 2017.

The results conformed to market expectations, but the fact that the company’s higher-value specialty chemicals business was the one driving higher earnings is encouraging, according to Wade Napier, an analyst at South Africa-based Avior Capital Markets.

“It is broadly in line with what I was looking for,” Napier said. “I suppose probably the most exciting aspect of the results is quite encouraging growth within its specialty chemicals business. That is probably the biggest value-add sector that they operate in, so it is encouraging that to see that there are those tailwinds in that business of theirs.”

Polymer sales for July-December 2017 jumped 18% to 857,000 tonnes, while fertilizer sales slipped 1% to 256,000 tonnes. Performance chemical sales for the period rose 3% year on year to 1.63m tonnes.

Progress continues on the company’s Lake Charles cracker complex project, which the company estimates is 81% complete, with capital expenditure standing at $8.8bn. The project is proceeding on time and remains within the current budget guidance of $11.13bn.

““It was a positive to see that Lake Charles is on track with their revised guidance… particularly given that that project set to be commissioned within the next six to nine months,” Napier said.

The complex is likely to be the last investment by Sasol at that scale for some time, after a $2bn upward revision to the Lake Charles budget in mid-2016 on the back of labour costs and delays was compounded by an additional $130m increase due to the impact of Hurricane Harvey.

The company said in November 2017 that it is to focus on projects with a price tag of between $500m and $1bn for the foreseeable future until it has built a sufficient track record on successfully executing lower-budget projects.

New multi-billion dollar greenfield chemicals capacity investment is unlikely at present without a co-investor or joint venture partner, according to CEO Bongani Nqwababa.

“We have taken on board the lessons of capital investment… larger projects are not within our immediate focus,” company CFO Paul Victor said at the time.

The shift away from mega-scale projects may be disappointing for investors, but makes sense for the company after years of trying to compete on scale with the world’s largest producers, according to Napier.

“Sasol is not a global major, they’re a mid-cap company. And ultimately, it is difficult for a mid-cap company to make the same scale of investments as large cap global integrated oil and gas producers are making,” Napier said.

“At first take, it is disappointing to hear a company say [they are] not going to pursue any mega-scale projects… but in hindsight ultimately it will be better for the company,” he added.

Sasol’s cost of capital stands at 8%, and betting betting on a project like Lake Charles to offer sufficient returns to justify that investment is a far more hazardous proposition for a mid-tier chemicals firm than using those funds on smaller projects, according to Napier.

“If you run an $11bn project that doesn’t meet cost of capital it’s a disaster, but if you undertake 20 different $500m projects and two or three don’t meet cost of capital you have still ultimately got 17 projects that beat that. So I think in that sense it is a sensible move,” he said.

Recent US tax reforms are likely to boost returns from the project, Sasol added.

The company will release its full fiscal first-half results on 26 February.

($1 = R12.08)

Additional reporting by Pearl Bantillo

Pictured above: Construction of ethylene storage tanks at Sasol's Lake Charles, Louisiana, petrochemicals complex as of Q1 2017 (Source: Sasol)

By Tom Brown