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Sasol’s latest quarterly production update had a lot more to cover than usual, and the administration had to explain the impact of not just one but two hurricanes that hit the US coastline just a few weeks apart.
Hurricanes shuttered its Lake Charles Chemical Project (LCCP) plant for weeks, just as the plant was restarting operations after the shutdown caused by the Covid-19 pandemic.
Management also had to answer questions about the pending sale of parts of the LCCP to LyondellBasell Industries during a webcast to discuss Sasol’s performance over the past three months.
CEO Fleetwood Grobler and CFO Paul Victor still delivered a positive message, both basically telling shareholders that all of Sasol’s divisions are recovering well from the Covid-19 shutdown, while chemical and energy prices they are also recovering.
Oil recovery
“Oil prices have recovered thanks to increased demand and lower production due to OPEC cuts,” says Grobler, “while chemical prices have risen thanks to the recovery in China.”
It also argues that a general increase in the production costs of chemicals has supported the prices of chemicals.
“I think we’ve seen the turning point in the chemicals market,” he told his audience of analysts and fund managers.
It is an open question if the shareholders agree. It appears that the stock price is still stuck in a downtrend, dropping below R100 this week.
Investors don’t like being reminded that the stock was still above R170 in June and around R300 at the beginning of the year.
Unsurprisingly, the production figures for the first quarter of the new fiscal year are not looking good.
In essence, only the Secunda-based SA synthetic fuels division performed well compared to the first quarter of financial year 2020, but even this strong performance should come with a small footnote.
The production of all chemical products increased at the Secunda plant, while the production of synthetic fuel was on par with that of the same three months of the previous year, and obviously much better than during the previous closing quarter.
But the numbers mask the fact that Sasol typically closes its Secunda plant for annual maintenance during the first quarter of the fiscal year, which it did not do this year. This year, maintenance was done earlier during the Covid-19 shutdown when the demand for fuel dropped dramatically and not according to the normal maintenance schedule.
Therefore, the footnote should read that the figures for the quarter ending September 2020 compare a plant operating at full production with one that was closed for maintenance for a few weeks in the corresponding 2019 quarter.
The Natref plant reported an 18% drop in total production compared to a year ago.
Low fuel demand
“Natref’s production for the first quarter was, as expected, 18% lower as a result of the decrease in fuel demand, particularly the lower demand for jet fuel in South Africa due to the Covid-19 lockdown,” according to the quarterly report.
“The lower demand for fuel continues to hamper Natref. Operating at a lower rate is a huge limitation, ”says Grobler.
He said he couldn’t venture to comment on when demand for jet fuel in particular will pick up.
Figures show that most of Sasol’s businesses performed worse than a year ago. Its SA mining operations suffered due to the ongoing impact of Covid-19 on productivity. Productivity was 2% lower, as measured by Sasol’s productivity measure, resulting in a 7% decrease in total production during the quarter.
Coal
Lower production forced Sasol to buy coal from other producers to ensure a sufficient supply to keep its synthetic fuel plants running.
Additionally, management says Sasol is building up a larger-than-usual reserve of coal to prepare for the risk of a second wave of Covid-19 that could affect mining operations again.
While natural gas production increased somewhat in Mozambique, the increase was offset by a reduction in Canada. Gas production in Canada is declining as gas wells are depleted, a “trend to continue through the financial year.”
One positive figure is that crude oil production increased considerably in Gabon, thanks to the entry into production of new oil wells.
And then there is LCCP. By producing base chemicals and high-yield chemicals, the huge plant in the US showed an improvement in production of some products, but has problems in others compared to a year ago.
Laura and Delta
“Our Lake Charles production was affected by Hurricane Laura, one of the strongest hurricanes on record on the Gulf Coast. The hurricane made landfall on August 27, 2020 near LCCP in southwestern Louisiana.
“After Hurricane Laura, Sasol made significant progress in preparing the LCCP facility to restart. The restart had to be suspended as a precautionary measure due to Hurricane Delta, which made landfall near Lake Charles on October 9, 2020, “says management.
“All units that were in operation prior to Hurricane Laura are expected to be operational again by the end of October 2020.”
Unfortunately, the damage had already been done.
While basic chemicals production in the US increased sharply (from a low base), it was still somewhat lower than expected and prices were also lower due to weak demand.
Performance chemicals sales volumes fell 11% in the quarter under review, due to Covid-19-related restrictions that affected many of Sasol’s key markets, management says. “This was compounded by an unplanned blackout after Hurricane Laura disrupted power.”
The net result of the hurricanes and all the figures is that LCCP is expected to generate earnings before interest, taxes, depreciation and amortization of between $ 50 million and $ 120 million for the current financial year.
CFO Victor admits that this is a wide range and lists a long list of reasons for the uncertainty. One reason is the uncertain outcome of a hurricane damage insurance claim.
It also lists the outcome of the US elections, the global economic recovery, and the ongoing Covid-19 pandemic as factors to consider. However, he seems confident that the figure will finish towards the upper end of the range.
A ‘good story’ to come
Victor says Sasol is “making good and steady progress” in strengthening his balance sheet and promises a “good story to share with you” when Sasol releases an investor update in early December, just a few weeks away.
He reiterated that the directors have not yet decided on the proposed rights issue, referring to the possibility of a R2 billion rights issue that Sasol alluded to earlier.
“The decision is still up for grabs. We are doing everything possible to avoid a rights issue. ”
Victor says the decision to go ahead with a rights issue does not depend on the current (low) price of the stock.
Shareholders may disagree, as they are asked to decide whether to approve the sale of part of the LCCP complex to LyondellBasell Industries. A circular was published with details of the transaction and shareholders should vote on the proposal in a few weeks.
What are the options?
Sell some of LCCP’s future income stream to someone else, or rather contribute the money by buying more shares in a rights issue?
