Most things appear obvious in hindsight. But when the emotions are stirred and the fever is high, it takes a strong constitution to reject popular opinion. When it comes to investments, however, failure to engage a directed mind can be very costly.
We were reminded about this reality earlier in the week after the release of the 2017 annual financial results from BHP Billiton. Specifically how the Melbourne-headquartered mining group finally caved in to shareholder pressure and will now unwind a six year old blunder.
In 2011, the group’s young but highly respected CEO Marius Kloppers took a $20bn bet on the hyped-up US shale gas sector. The Pretoria University and MIT educated Kloppers, then 49, was four years into his term and riding the crest of the wave.
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I remember his period in the spotlight with little fondness. Not least because of the manner in which Kloppers publicly forswore his South African roots in his eagerness to be accepted within the group known as “The Big Australian”.
Long-time BHP Billiton shareholders are today similarly prejudiced against the Cape Town born chemical engineer, but for different reasons. Kloppers’ enthusiasm for shale gas has cost them a fortune.
Led by billionaire activist Paul Singer of Elliott Advisors, BHP Billiton shareholders have been demanding the mistake be rescinded. Even though it will involve a write-off of around half the investment, some $9bn, the group’s board has finally agreed.
Unfortunately for hundreds of thousands of South African investors in Sasol, Kloppers’ mistake was repeated by one of the JSE’s favourite stocks. Arguably with even greater enthusiasm.
Sasol’s 2011 annual report now makes embarrassing reading for insiders.
That year the group dedicated its “Focus Story” to highlighting a R14bn investment into two Canadian shale gas projects. The report gushed about the promise of the shale gas bet, noting that it was “the largest investment (sic) since the initial investment in our facilities at Sasolburg and Secunda many decades ago.”
Sasol’s bet on shale, just like BHP Billiton’s, has come back to bite. And it is still doing so.
The group’s annual report notes that the shale gas operations lost a further R1.1bn in the 2017 financial year to end June. That comes on top of a R1bn loss in 2016. And, more spectacularly, write-offs of R9.9bn and R1.2bn in the 2016 and 2015 financial years. So by now pretty much all of Sasol’s 2010 investment has gone down the drain.
Looking back, it seems crazy anyone would bet billions on a mushrooming new source of fuel at the precise time when the oil price traded at record levels. All one needed to be able to work that out, was an Econ 101 understanding of how expanded supply affects the price of a commodity. And some common sense.
But when animal instincts rule, logic is the first casualty. Kloppers and his erstwhile counterpart at Sasol, David Constable, got the experience and have long since departed. Their shareholders, however, are still paying the price. A reminder how acting in haste usually leads to repenting at leisure.
