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Sasol profit to drop 30% on R11.5bn charges, lower oil price

Johannesburg - Sasol [JSE:SOL] said full-year profit will drop as much as 30% as the world’s biggest producer of motor fuel from coal is hurt by lower crude prices and it booked R11.5bn of impairments on its share of a shale-gas asset in Canada and because of a decline in natural-gas prices.

So-called headline earnings will decrease 10% to 30% in the year to June 30 from R49.76 a year earlier, Sasol said in a statement on Monday.

Sasol wrote down R7.4bn of its share in the Montney shale asset in Canada in December and will recognise a further writedown of about R4.1bn because of lower natural-gas prices, which have fallen 12% since July last year. Brent crude, to which the producer’s revenue is linked, has dropped 20% in the period.

"We’re being very conservative, so that allows us to protect the gearing, pay the dividend and make sure the credit rating stays where it is,” CEO David Constable told Bloomberg in March, in reference to the 7.4bn writedown.

Long term, Montney is a “great asset,” he said.

Lake Charles project to increase to $11bn

A preliminary finding from the ongoing detailed Lake Charles Chemicals Project (LCCP) review started in March is that the expected total capital expenditure for the project could increase up to $11bn, including site infrastructure and utility improvements, Sasol said on Monday.

"While the detailed review is still in progress, current indications are that the estimated capital expenditure increase is mostly due to construction delays caused by higher-than-expected rainfall, higher labour costs, certain of the lump-sum bid contract prices being higher than originally estimated, as well as quantities of bulk materials being in excess of those included in the original estimate," Sasol said in a statement.

"In addition, the slower rate of capital spend until June 2018, due to Sasol's low oil price response plan, has resulted in an extended project schedule and contributed to further project cost increases, which have been partially offset by productivity benefits due to improved phasing of engineering and construction activities."

As of 30 April 2016, the capital expenditure to date on the LCCP is $4.5bn and the overall project completion has progressed beyond 40%, Sasol said.

"It is, however, important to emphasise that no material or unexpected scope changes to the project have taken place. Overall construction on the project continues on all fronts, with most engineering activities nearing completion and procurement well advanced."

It said it is expected that the ethane cracker will achieve beneficial operation in the second half of calendar year 2018, which will enable around 80% of the total output from LCCP to reach beneficial operation later in 2018 and early 2019. The remaining volumes from the other derivative units will reach beneficial operation by the second half of 2019.

It said the expected returns for the project have reduced due to changes in long-term price assumptions and the higher capital estimates, and are now expected to be around Sasol's weighted average cost of capital, compared to returns approximating hurdle rate at the time of Final Investment Decision in October 2014.

"The increase in the estimated LCCP capital cost and extended schedule will reduce the expected project returns by approximately the same amount as the Company's lower long- term price assumptions."

"Although the capital expenditure for LCCP is expected to increase, Sasol does not expect this to result in the company exceeding its self-imposed gearing targets. The company is continuing with its previously announced low oil price Response Plan, and will manage its balance sheet to incorporate the current estimated capital expenditure."

Sasol said the funding strategy has not changed as a result of the higher capital expenditure estimates. "The project will continue to be funded from existing facilities and ongoing group cash flow," it said.

- Additional reporting by Fin24.

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