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US project will free up capital for shareholders, says Sasol

Nov 23 2017 10:07
Lameez Omarjee


Company Data

Sasol Limited [JSE:SOL]

Last traded 32
Change 3
% Change 10
Cumulative volume 9032872
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg – When Sasol’s [JSE:SOL] Lake Charles Chemical Project in the US comes on line in 2018, it is expected to boost the profit contribution of the chemicals business unit by more than 50%, and free up capital for shareholder returns, said Sasol’s executives.

Speaking at a briefing at Sasol’s head office in Sandton on Wednesday, joint presidents and chief executive officers Bongani Nqwababa and Stephen Cornell as well as chief financial officer Paul Victor informed media that the group’s new strategy would see more value delivered to shareholders, more frequently.

Sasol expects to hit peak gearing once the Louisiana-based project starts operations. “Once Lake Charles comes online there will be sufficient cashflows coming onto the balance sheet, to deleverage and give flexibility to execute the strategy,” said Victor.

Earlier this year productivity of the $11bn project was impacted by extreme weather events in the US, including Hurricane Harvey, followed by Irma and Nate, said Cornell.

Harvey cost the plant $130m in lost productivity. The project was shut down for more than a week, Bloomberg reported previously.

“The project budget did not cover unplanned or event-driven risk,” said Cornell. The existing contingency could not absorb the impact of the hurricanes. As a result, contingencies have been revised to $11.130bn. Cornell added that an updated cost estimate would be provided in the half-year results announcement next year.

Productivity levels at the project have been recovering, he said.

Nqwababa explained that the hurricane did not impact the plant directly, but rather the areas from where labour is sourced. “So employees chose to work closer to home and rather fix their houses than travelling 300km to Lake Charles,” he said.

Victor also added that the existing contingencies allow for rain delays, but not big events. “Three hurricanes are too much to expect,” he said.   

Cornell further explained that the contingencies make provision for price escalation of equipment or labour, issues around equipment and modules, productivity of the workforce and errors in estimates. “The contingency is still there, we still have enough to finish the project.”

Lake Charles remains on track for completion in the second half of 2018. As of September 30, the project was 79% complete. Capital expenditure amounts to $8.1bn. The plant will triple Sasol’s chemical production capacity.

With the oil price taking a dip, Sasol’s chemicals business has increased its contribution to profit from 40% to 50%. When Lake Charles gets commissioned the contribution will be likely more than 50%, Nqwababa told Fin24.

Sasol made a few hard decisions, such as discontinuing investment in further gas-to-liquids, crude oil refining capacity, commodity chemicals and renewables, said Nqwababa.

But it will focus on growing its specialty chemicals business globally, of which Lake Charles forms part. The group will also continue exploration and production in Mozambique and West Africa and grow its retail fuels footprint in southern Africa.

Based on scenario modelling, the group aims to deliver return on invested capital of 12% and a growth rate of 5% in earnings before interest and taxation. Dividend payouts for shareholders are expected to grow from 36% to 40% by 2022 and thereafter to 45%, explained Victor.

Speaking on the group’s strategy to provide more value for shareholders, Victor said the group has gone through a “significant” growth phase and has made a decision to reward its shareholders, who have been patient. He emphasised that the group is taking a balanced approach between growth and higher dividends.

“We can do both, sustain the growth rate and pay higher yields,” he said. South African investors particularly want consistent dividends and consistent dividend returns. By paying higher dividends, the group also aims to attract more investors, internationally. 

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