Writedowns point to Sasol selling stake in Lake Charles

In a potential sign that Sasol will sell a stake in its Lake Charles Chemical Project at a discount, the petrochemicals group said it will write down chemicals and energy assets by more than R100bn as the Covid-19 pandemic hit commodity prices and product demand.

The writedowns, which will push the debt-laden company into an annual loss, will largely be charged on its base chemical assets, whose valuations would be slashed by R71.3bn while its energy and chemicals portfolios will be cut by R12.5bn and R27.7bn.

The writedowns come at an inopportune time for Sasol, which is in the middle of selling assets to pay down its mountain of debt, and could mean the sale of its 50% stake in its base chemicals business, which forms part of the giant Lake Charles project, will be done at a marked down price.

OVER BUDGET

The Lake Charles project in the US has run 45% over budget to $12.9bn (R225bn) and has weighed heavily on the group over the past 18 months.

Sasol, which is groaning under R143bn of borrowings as at end-December, hopes to raise at least $2bn through asset sales and possibly more in order to avoid a rights issue.

It is also targeting a further $2bn through cost cuts.

Abdul Davids, head of research at Kagiso Asset Management, said the writedowns “could be a precursor to the much anticipated sale of the 50% stake in the base chemicals plant at Lake Charles”.

Sasol’s share price was 4.4% higher at R158.3 a share at the close on Tuesday.

Wayne McCurrie of FNB Wealth and Investment said while the writedowns indicate “Lake Charles was a massive waste of money”, the share price has not reacted negatively because Sasol’s market capitalisation had already lost more than that some time ago, after the extent of the cost overruns and delays at Lake Charles had become known to investors.

“So the big writedown in Lake Charles was already in the share price,” he said.

Sasol, with a market capitalisation of R95bn, has been further hit by ultra-low oil prices and lower demand as the Covid19 pandemic disrupted global economic activity.

The group expects to report a headline loss per share of R8.72 to R14.86, from headline earnings per share of R30.72 previously. It further warns of an expected drop in adjusted

earnings before interest, tax, depreciation and amortisation (adjusted ebitda), or core earnings, of between 17% and 37%, or between R30bn and R39.5bn. Headline earnings is the main profit measure that strips out certain one-off, nontrading items.

Davids said the adjusted ebitda range is ahead of Kagiso estimates, while Zaid Paruk, portfolio manager at Aeon Asset Management, said the earnings are broadly in line with expectations.

Richard Cheesman, senior investment analyst at Protea Capital, said given the drop in the oil price during the second half of Sasol’s financial year, “the company did well to control cash costs and still earn a core profit for the second half”.

The numbers were, however, adjusted and “we are always cautious of the accounting around adjusted numbers”.

What this all means for Sasol’s debt and its debt covenants with lenders will be key, but the trading statement gives little away. Cheesman noted that a 23% weakening of the rand to the dollar over the period may not bode well for the group’s dollar-denominated debt. With indications that the company has made good progress with cost cuts and asset disposals, it is hoped that a rights issue can be minimised if not avoided altogether.

Paruk said it is likely that Sasol may yet be forced to undertake a rights issue, while McCurrie sees a $500m rights issue as the worst case scenario. “As long as the oil price doesn’t fall don’t think the market will even worry about a $500m rights issue,” he said.

“Sasol will come into some serious positive cash flow now that Lake Charles is no longer a drain on the group.”

SASOL WILL COME INTO SOME SERIOUS POSITIVE CASH FLOW IF LAKE CHARLES IS NO LONGER A DRAIN