With over a third of its shareholders used to seeing quarterly updates, Sasol appreciates the need to communicate often. It did so again this week with production rsesults for the first three months of 2017 providing details of a portfolio that ranges from its flagship synfuel operations in South Africa to natural gas in Mozambique and Canada and crude oil in Gabon. The key focus, though, is on the new Louisiana chemicals plant which has been bedevilled by cost overruns and delays. The good news is this project at Lake Charles is now 68% complete and cost to date of $6.7bn is in line with the updated estimates. For some added insights, I caught up with Sasol’s joint CEOs Bongani Nqwababa and Steve Cornell (below) where the conversation kicked off, naturally, with progress on the chemicals plant, reputedly the biggest foreign direct investment into the US. – Alec Hogg
So how are things going in the US…..?
We took investors on a roadshow to Lake Charles at the end of March, because seeing is always believing. The investors came and they wrote their stories that the worst is most likely, behind us but there are always risks in these projects. We reported today, when we issued our production report that now also issue progress on the LCCP which is 68% done with just under $7bn spent. And so far, we’re not changing the schedule as announced in August last year and we are not changing the cost either. We keep focusing on it and we’ll keep reporting if the situation improves, but we’ll only do that when we put on the final paint coating.
I guess the other thing that we see from an industry perspective, is most of the consultants and analysts – the Wood Mackenzie’s, IHS’s and others – are continuing to see good supplies of ethane being further out in time so that the period which we believe will have low cost ethane feed versus our competition, seems to be a longer duration. That’s playing on the positive side as well. I think everybody’s starting to see good, long-term value for it. We all wish it could be done quicker and cheaper. But folks are getting their heads around the size of it and that we’re on a good path. Now, we just have to deliver it.
The Trump Administration’s first 100 days in office: is there anything in there that’s been worrying you or maybe heartening you?
Actually, it’s neutral to positive because most of the licenses, except for the big environmental ones, are from the state of Louisiana and all of them are unlikely to be changed, so that is proceeding as planned. The proposed reduction in taxes as you are aware is positive and the talk of a pipeline from Canada is actually quite positive. The only potential problem, which I have heard (and I need to analyse that news more because I was away for a few days) is the issue of a tax on natural gas. I’m not sure what that is all about.
What would worry us a little bit, although unlikely, is if we were to get into a kind of war of import duties with others (we’ll put up import duties on the United States, and China’s going to put up import duties and others); if that escalated and they are starting to change the dynamics of where we could ship our products to, that would be of concern. But we really see that as a low probability. It looks like the more Trump gets in and understands the global dynamics of the world, the more he understands it’s not as easy as it looks at first. We think it’s pretty neutral because we’re doing everything the Trump Administration seems to want, which is to build in the US, manufacture in the US, sell in the US, and export to others. And create jobs.
From that perspective, we feel like we have a pretty sound basis vis- Ă -vis the new administration.
On the South African business, the oil price is still something that has such a huge influence on Sasol’s profitability at the moment….
It still has. As you might be aware, the sensitivity of it is that for both a one US dollar movement in the crude price and a ten cents movement in the exchange rate, the effect on our earnings is R730m to R740m p.a. so it’s quite material.
We’ve announced on the market that we have taken the opportunity to try to put some financial hedges in place where possible, on both the Rand/Dollar and also on crude pricing and that way, try to minimise the overall impact of large swings. In our recent release, we did note that.
Could you explain that a little more – the hedges? Would you then take a view on the oil price or the Rand and try protect yourself that way?
Correct. The hedges for currency are different from the hedges for the oil price. On the currency, we are using zero cost collars but then it means that the price you get would have a range of 15% to 20% above the spot where you’ve hedged at.
You have a floor and a ceiling and between those two, you can lock it in at zero cost. We do that for the Rand versus the Dollar. On the oil price, we just use a put instrument, which sets the floor. It’s like an insurance. A certain number of barrels locked in at a certain price for a nominal fee. If it goes up, we get the upside but if it goes down, we’re protected against the downside.
If the Rand were to fall out of bed… Let’s just say, R15 – R18 to the US Dollar, would you then not benefit from it?
We’d only benefit partially. We don’t lock it all in because we don’t hedge 100% of our exposure. The other is that we have (on the upside) put a number of hedges in, so they are different. Say we put in a floor to protect us so that it doesn’t strengthen any more than say, 13 or in that range (and again, please refer to our SENS) and then has a cap at maybe 15… If it fluctuates in there, we’re fine. If it were to fluctuate outside of that range, we would lose some of the positive, but we’d be protected against it strengthening, which is our major concern.
Essentially, you are enjoying the benefits of a premium by locking in.
Yes, because we’re reducing uncertainty. These hedges are rolling quarterly hedges.
So, you can reassess every quarter?
Correct.
Depending on the volatility in the market also depending upon our own internal view about balance sheet, how much risk we want to take, and how much risk we want to protect against.
How are you guys seeing the market, generally? Just starting off with South Africa and other parts of the world…..
Certainly, on the fuel side as you would see from the production report, which we issued earlier today, there are lower volumes, which is likely related to economic conditions. But also related to us – we are high margining our molecules because we commissioned a propylene plant last year so it there was more margin on the chemical side. So we swung the margins towards the chemicals compared to last year when it was more on the fuel side. It’s a combination of factors on our side but it’s a fact that the demand is being impacted on the fuel side. On the chemical side though, with the growth globally picking up, our growth in chemicals is certainly picking up as well.
Worldwide chemical prices are slowly strengthening.
Once Louisiana’s up and running, how much of an impact is that going to make?
Initially, in 2020 the EBITDA will be $1bn and then by 2024, it will be up to $1.5bn.
How does that influence your targets for the group as a whole?
In terms of earnings, just under 80% is currently from South Africa, with the balance from the rest of the world. Post-commissioning, it will be closer to 50/50 in South Africa and the rest of the world.
You’ve got a lot of shareholders. What’s the latest count?
Contrary to popular belief, just under 65% of our shareholders are South African and the rest are from the rest of the world, largely North America.
In numbers…hundreds of thousands?
Oh, millions. I’m including retail investors by the way.
What are you saying to them right now?
Our message is consistent in that we are focusing on matters within our control, which is the safety of our people and equipment, our cost base and then, our production volumes. In all the things that are under our control, we are largely delivering. The market will comes when it comes but we can’t be betting the company on speculating on future market movements. We have to be profitable even at $40 a barrel.
We do get questions around the dividend and dividend policy. We’ve run our models out for several years. We do not see changing our basic dividend policy, which is a cover policy. It ranges between 2.2 to 2.8 on cover and we’ve been paying it at 2.8 during this time of large expansion. Once the LCCP comes up on line, we’ll start looking at our capital allocation and what we do with opportunity to increase dividends or whatever the case may be. We do get that question quite often and we’ve been very firm: We do not see any change in our dividend policy over the next year or two.
We moved away from a progressive dividend to a cover-based dividend because we didn’t think that a progressive dividend is appropriate for a company of our nature.
Relative to other companies in your sector, your peers; the last time I did an analysis, you were rated below them. Is that still the case?
That’s still the case. That’s why later in the year, we’re having a capital market day. This issue of changing from being a largely energy company to a largely chemical company and the economics for the Lake Charles project are not fully understood, as well and then the economics for the Production Sharing Agreements in Mozambique, are also not fully understood. We are working on articulating our strategy in capital allocation better, and over time, we would expect that would help close the valuation gap.
How big is that gap now?
If you look at our EV to EBITDA, our ratio must be getting close to 5 now but if you look at our peers in the chemicals factor, it’s between 6 and 8.
So, there’s quite a bit of scope for a rerating.
We think so. We believe so.
