Sasol, which has been grappling with major cost overruns at its Lake Charles chemicals project (LCCP) in the US, shocked the market once more on Friday by saying it has to delay the release of its full-year results by a month after a probe found “possible LCCP control weaknesses”.
The energy company’s shares responded by falling as much as 15.9% to R233.93 on Friday morning, the worst level since 2007. Less than a year ago, the stock was at highs of close to R580.
Despite the sharp sell-off in recent months — as the extent of the group’s cost overruns at Lake Charles became clearer — PSG Wealth portfolio manager Schalk Louw said he was advising clients against buying Sasol shares, at least for the time being.
The company, which warned of lower earnings in July as it wrote down the value of assets in North America and Africa by R18.1bn, said previously it had commissioned an independent review of the Lake Charles project to explain the cost overruns and project delays.
A preliminary report “contains observations which point to possible LCCP control weaknesses”, Sasol said on Friday.
“Management and the board will assess such control weaknesses and identify whether any further remedial actions are required.”
Meanwhile, the company’s auditors had to consider these assessments, meaning the board now expected to announce the 2019 financial results on September 19, rather than August 19.
Sasol said it was still confident that its recent guidance on earnings, along with an estimate that the LCCP project would cost between $12.6bn and $12.9bn, remained intact.
The group said in July that because of the impairments, full-year earnings per share probably plunged between 46% and 56%. Adjusted earnings before interest, tax, depreciation and amortisation (ebitda) fell between 4% and 14% despite the 19% hike in the rand-per-barrel price of Brent crude oil.
Sasol spokesperson Alex Anderson said on Friday that the previous LCCP project management team “did not have adequate segregation of duties and failed to engage the wider financial organisation to verify the accuracy of their forecast” for costs.
Sasol acknowledged that its internal cross-checks “were not robust enough”, Anderson said. “The previous LCCP leadership was not transparent in these matters and the new LCCP leadership has been instrumental in identifying and remediating these issues.”
Cost-projection errors were limited to LCCP. “Our group-wide financial controls are sound and we have no concerns regarding the robustness of our financial reporting,” Anderson said.
PSG Wealth portfolio manager Schalk Louw said the share price reaction on Friday showed that “the market is extremely worried” about Sasol.
It was possible that Sasol could join the ranks of top-40 companies whose debt piles now exceeded their market capitalisations, Louw said, citing Aspen Pharmacare as another firm in that position.
Sasol’s current debt levels may be higher than the R131.6bn on its books at the end of December 2018, Louw said. The company’s market value was R157.9bn on Friday afternoon.
Considering that the group’s income was also under pressure, particularly in the face of a possible economic recession, this was “not good at all”.
Louw said he was advising clients to wait for more clarity and "certainty" before buying Sasol shares, despite the sharp sell-off.
Sasol said in its update on Friday that the launch of its ethane cracker plant at Lake Charles was hindered by “a technical challenge relating to a large heat exchanger”.
“The startup has now resumed,” Sasol said, adding that it would provide an update by August 26.
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