Sasol stock sank to a 16-month low on Friday after the petrochemical giant flagged delays and cost-overruns at its multibillion-dollar US investment in Louisiana.
The Lake Charles Chemicals Project, halfway between the southern cities of Houston and New Orleans, is now expected to cost as much as $11.8bn (about R160bn), at least $500m more than recently forecast, the company said.
In 2014, Sasol decided to invest $8.1bn in the Lake Charles ethane cracker and derivatives complex, at the time one of the largest investments of the decade into the US by a foreign company. It now makes Sasol one of a club of South African companies that have had a bumpy ride hitching their futures to business in the developed world.
Retailer Woolworths has had to write off R7bn in the Australian department store chain it bought in 2014. Steinhoff recently let go of half the equity in restructured Mattress Firm, a company it bought three years ago for $3.8bn. And Netcare last year exited its investment in British private health-care company BMI after 10 years due to tough trading conditions.
But Sasol's punt is not an acquisition gone sour. It is a large foreign direct investment gobbling up more resources than planned.
The productivity rate for the project closely tracked Sasol's estimate until the latter part of the last quarter, when weather conditions, engineering issues and labour disruptions interfered, the company said. Some of the units in the new complex will be delayed by as much as five months.
"Sasol used to be a great dividend payer, some of it [is] being absorbed by the project," said Gryphon Asset Management portfolio manager Casparus Treurnicht. "There is probably a feeling that lower dividends for longer is going to be a reality."
Shares in Sasol lost 6.5% to R384.78 on Friday, wiping more than R15bn off the JSE's eighth-largest company.
The Lake Charles project is a long-term play by Sasol to produce ethylene and related products at low cost. It consists of a 1.5Mt/year ethane cracker and six downstream units.
The move is part of a diversification strategy to be less dependent on South African fuel production operations that are heavily exposed to the price of crude oil.
"Despite the revised cost and schedule, we still consider the [Lake Charles Chemicals Project] to be a sound strategic investment that is of significant importance to Sasol's future growth and will generate value for our shareholders for many years into the future," the company said.
Sasol picked the US Gulf Coast as its investment destination due to the region's infrastructure for transporting and storing low-cost ethane. While it already had operations at Lake Charles, the new complex was embarked on with the plan to triple the company's chemical production capacity in the US so as to tap into a growing market for ethylene products.
But with product prices having declined for a while, investors are worried that the project is not going to deliver as promised, Treurnicht said.
"I am not of the opinion that much of the future benefits were priced into the share, but nonetheless. any additional losses would be concerning," he said.
Heavy rainfall - more than 800mm from September to December - cumulatively cost the company a full month in work stoppages. Productivity losses were exacerbated by high absenteeism around US national holidays. Incomplete engineering work and defective carbon steel forgings also added a month.
Whereas the company was expecting the project to add $110m to $160m to profits in 2019, it now forecasts a loss of $165m to $195m.
"However, we maintain our guidance that [the project] will deliver a steady state [earnings before interest, depreciation, taxation and amortisation] of $1.3bn in 2022," the company said...