Sasol shares plunge as Lake Charles woes continue to eat into profits

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Shares in Sasol [JSE:SOL] fell by 7% in early trade on Monday morning after it announced in a trading update that its earnings for the six months ended in December 2019 had plunged by 72%, largely because of its troubled Lake Charles Chemicals Project (LCCP).  

It will also not be paying an interim dividend. 

The petrochemicals giant said the LCCP, in Louisiana in the US, will start generating enough revenues to match its expenses and move towards profitability in the second half of its 2020 financial year, which ends in June.

Sasol announced last year that the project had experienced severe cost overruns. The company fired its joint CEOs, Bongani Nqwababa and Stephen Cornell, after a forensic investigation found mismanagement in the project.

Last month, meanwhile, one of the project's units which was in the final stages of commissioning experienced an explosion and fire. It had to be shut down for repair and investigation.

On Monday, the group announced in its interim results announcement that its earnings for the six months ended in December 2019 had plunged 72% to R4.5bn , compared to R15.9bn to end December 2018, largely because of Lake Charles. 

The group said its earnings also fell because of a 9% decrease in the rand per barrel price of Brent crude oil, softer global chemical prices and refining margins, and lower productivity in its mining operations.

However, Sasol said it is anticipating that the problematic Lake Charles project will start generating positive earnings before interest, tax, depreciation and amortisation in the second half of its 2020 FY. 

Four of Lake Charles’ seven units have come online, an update published by the group last month showed. With more units expected to come online before the end of FY 2020 (except the low-density polyethylene [LDPE] unit that caught fire in December) Sasol is expecting the project to be a game changer for the group.

The LDPE unit was supposed to achieve beneficial operation in December 2019, but this has now been delayed to the second half of Sasol’s 2020 financial year which ends in June. Sasol added that, by the end of December 2019, the Lake Charles Chemicals Project was 99% complete.

“The Lake Charles Chemicals Project’s volume growth will significantly strengthen our position as a global chemicals company,” said Sasol in its results booklet.

Because of the Lake Charles losses and weaker performance in Sasol’s other businesses (its energy portfolio was affected by lower crude oil prices and lower refining margins) the group said that, protect its balance sheet, it will not be paying an interim dividend. 

“This is a decision that was not taken lightly as we remain committed to delivering shareholder value, however, given the current position of our balance sheet, the Board made this decision in the long-term interest of our shareholders. We continue to ensure that we deliver the key elements of our strategy, particularly the completion of the LCCP.”

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