Sasol’s $11bn US bet hinges on the oil price

As the project’s bill mounts, opinions on it and the departing CEO’s merits are divided

IT was the most brilliant investment that money could buy at the time. The oil price was at more than $100 a barrel when, in 2014, Sasol CEO David Constable announced the US ethane cracker project that would cost $8.9-billion.

Even though the company faces low global oil prices and construction delays on the project, which will now cost $11billion (about R163-billion), and shareholders knocked 10% off the stock price on Monday after news of the cost hike emerged, some analysts still rate Constable highly.

This is despite a dive in the company’s value. In 2011, when Constable took office, Sasol had a market capitalisation of R236billion, which peaked at R411billion in 2014. Now, as he leaves the company, the market capitalisation is R273-billion, close to where it was when he started.

The ethane cracker is going to be the largest petrochemical project in the world. Sasol estimates that it will triple its chemical production capacity. However, on Monday it said there were construction delays due to bad weather, labour costs had risen and bid contract prices were higher than originally estimated.

The company expects the cracker, which is 40% complete, to reach “beneficial operation” in the second half of 2018.

With the new leadership duo of Bongani Nqwababa and Stephen Cornell taking over as joint CEOs in July, commentators question whether they should carry on with this multibillion-dollar project that could go terribly wrong if the oil price remains low.

Kobus Nell, an analyst at Stanlib Asset Management, said Sasol “needs to gain some trust from investors because clearly there is a big issue” in terms of the update on the project and how that differs from the original plan. “It doesn’t help sitting and worrying about volatility in oil prices unless you’ve planned in the long term,” he said.

Instead of worrying about a volatile oil price, the company should focus on getting the execution of the project right, he said.

Only long-term investors would stick with an investment like this.

“I think with this oil price, it’s something they can make work; it just depends on the project implementation. That is IN THE LOOP: Sasol’s future joint CEOs, Bongani Nqwababa and Stephen Cornell, are said to back the ethane cracker where the key concern is at the moment,” Nell said.

Wayne McCurrie, an analyst at Momentum, said the company could weather the storm at the current oil price.

When Sasol re-evaluated the project last year, the price was about $40 a barrel and today it was $52, he said.

“If it goes down to $30 a barrel and it stays there, then they’ve wasted their money. If the oil price goes [up to between] $60 and $80 and stays there, they’ll make money.

“I think a more realistic price, longer term, is about $60 to $80 a barrel. Anything more than that, the US shale gases can come back and supply the market and stop the prices from going up.” In the medium term, the oil outlook would be around these levels, he said.

Fay Hoosain, a senior vicepresident at Sasol, said on Thursday that Nqwababa and Cornell knew what they were taking on.

“They are both very committed. It’s not a case that this decision was taken independent of them and that they were not part and parcel of it, and they also understand what’s required to make it work,” she said.

Cornell, who is the executive vice-president for international operations, was overseeing the ethane cracker project. Nqwababa, the chief financial officer, had been involved in every analysis of the project in terms of what it needed to be able to deliver on the promised results.

The company they will run has expanded considerably under Constable’s leadership.

McCurrie said Constable had done a good job because “he has certainly expanded the company massively, but this expansion [through the US project] will only be successful if the oil price rises”.

The share price is up about 25% since 2011, during a period when the oil price dropped by about 50%.

McCurrie said that because of the volatility of the oil price, a good manager could be a bad one when the economy was not performing well, and with high oil prices, any manager could be a hero because companies would be doing well.

Hoosain said that in the past five years under Constable, Sasol was “fixing the roof while the sun was still shining . . . we were still taking very prudent measures to reduce our cost base, to improve our structures, to be more efficient and effective”.

This meant the company was in a far better position to weather storms that might come its way, she said. Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za