How long, the joke goes, would it take Sasol to create a R170bn company? Just a year: give it a R340bn company, ask it to build a disastrous, deadline-defying project in Louisiana, and wait. For the millions of SA pensioners who indirectly own shares in Sasol, still the seventh-largest SA company with a primary listing on the JSE, it’s an off-colour joke. But it’s on-point nonetheless.
Officially, Sasol’s project in question is known as the Lake Charles Chemicals Project. Unofficially, it’s known as the "late Charles" project, given that it’s a year past its original deadline. Worse, Sasol is set to spend 45% more on it than the $8.9bn first predicted in 2014, causing its return on the project to tumble below its cost of capital.
That, in a nutshell, is why Sasol’s share price has halved in a year, gobbling the returns of pension funds managed by the likes of Allan Gray, Investec and Sanlam.
Of course, had you considered Sasol’s track record in earlier megaprojects, you wouldn’t have been entirely surprised by its Louisiana dawdle.
Take, for example, the disaster of its Fischer-Tropsch Wax Expansion Project in Sasolburg, the town created on the south bank of the Vaal River six decades ago.
Back in 2010, Sasol first launched the project, which aimed to double the country’s production of hard wax, which is used in things like adhesives, inks, paints and coatings. The cost was pegged at R8.4bn, and both phases were due to be finished by 2014.
South Korea’s Lotte Chemicals built an ethane cracker right next to Sasol’s project, in half the time
By 2013, things had gone awry. Costs ballooned to R11.9bn due to "construction delays, civil unrest and a volatile economy". That year, Sasol took a R2bn "impairment" on the project, and CEO David Constable spoke of "some costs and schedule issues we’re dealing with".
A year later, in 2014, a report was written by law firm Werksmans, and given to Constable, which has never seen the light of day. But that report was scathing about Sasol’s execution of megaprojects.
For example, it spoke of how information about the problems in the wax project were deliberately kept from the board. And how some Sasol executives felt the "impairment" on the project should have been higher than the R2bn.
But the thinking inside Sasol at the time apparently was that a higher impairment might send a poor message to investors about how Sasol manages large projects. And with Lake Charles about to begin, Sasol couldn’t afford that. In early 2013, one Sasol executive warned his colleagues that the company "needs to consider what to communicate to the market, as this will not go down well".
In the end Sasol delivered the wax expansion project two years later, in 2016, for R13.6bn — 60% more than planned.
But the fact that information seemed to have been kept from the board suggested something was off-kilter with Sasol’s culture: rather than admit to problems, some felt it may be better to cover it up.
Has this been the story of Lake Charles too?
In May, Sasol hired independent experts to conduct a review of "circumstances that may have delayed the prompt identification and reporting of the above-mentioned matters". Asked at the time to explain what had happened, Sasol spokesperson Alex Anderson said the previous Lake Charles project team "was not transparent" in some financial matters.
Last week Sasol reported that the independent review had detected possible "control weaknesses".
It doesn’t look great. Especially since, as the FM reported last week, South Korea’s Lotte Chemicals built an ethane cracker right next to Sasol’s project, in half the time, and for $3bn — a quarter of what Sasol spent.
Asked why the company hadn’t told shareholders of its Werksmans report, Anderson said the "value of public dissemination of such reports would be doubtful". And anyway, he said, Lake Charles is a much larger facility, and the contracting strategy for large construction and engineering projects in SA differs from US Gulf Coast practice.
Perhaps. But had Sasol been more upfront about the extent of its blundering on megaprojects, investors might have been equipped to ask a few hard questions before giving it the green light to head off on its Louisiana mardi gras.
Clearly, Sasol has broken trust with its investors. This is why, even though its stock now looks cheap (on average, analysts believe there’s a 44% upside to its current price of R266), investors are still reluctant to dip back in.
But some analysts have had enough. Last week, SBG Securities slashed its expected one-year target price by 31%, from R350 to R240, and it reiterated its recommendation that Sasol is a "sell". "We remain concerned that given the numerous quality control issues in the construction of [Lake Charles], the plant may be unable to operate according to design," the analysts said.
And SBG also reckoned that Sasol needs to "materially" cut its debt, which will soon hit about $9bn, to avoid a ratings downgrade below investment grade. To do so, they reckon it will need to look at remedies like selling assets, possibly issuing new shares, or suspending its dividend.
It’s an awkward place for a company once seen as SA’s one shining industrial light, which has pinned its future on a project that has mercilessly exposed its internal frailties. Let us hope that this time it learns from the mistakes.
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