Sasol Trading statement - big write downs

Resources were lower, although on the whole it was a single company that was stinking up the joint, Sasol. The company gave guidance for the full year that ends at the end of this month, the stock by the time the day had ended was nearly 11 percent lower. Holy you know what. Why? The guidance in earnings included another write down of their British Columbia shale gas asset in the Montney shale basin.

It was a 50 percent stake that they had bought from Talisman energy back in 2011 for 2 billion Dollars, Talisman's stake itself was bought by Malaysian company Petronas in 2014 for 1.5 billion Dollars. Already less than Sasol paid. Since Sasol bought the asset, the natural gas price has about halved in that time, they have impaired the asset to the tune of 11 billion Rand. Eish, this often happens when you own these big project assets. The market didn't so much react to the earnings being volatile, rather the project overrun and escalating cost of the ethane cracker being built at Lake Charles in Louisiana was front and centre of the sellers minds.

Whilst results themselves are not expected until August, the market chose to sell first and then ask questions later. An increased project cost in Dollars (to 11 billion Dollars now) coupled with the weakening Rand means that gearing will have to rise more than anticipated, and more importantly for shareholders, there will be a delay, the first product will be delivered in the second half of 2018 as far as I understand it. The plant will be at full operational capacity in early 2019.

There was also a couple of lines in the project update (Preliminary findings of the Lake Charles Chemicals Project review) that may have left a bad taste in the mouth of investors, it follows as: "The expected returns for the project have reduced due to changes in long-term price assumptions and the higher capital estimates, and are now expected to be around Sasol's weighted average cost of capital, compared to returns approximating hurdle rate at the time of Final Investment Decision in October 2014. The increase in the estimated LCCP capital cost and extended schedule will reduce the expected project returns by approximately the same amount as the Company's lower long-term price assumptions."

I think that whilst investors were expecting more (they always do now, don't they?), the project on completion is still a company defining moment. There is a conference call today at 2 in the afternoon local time, in which longer dated investors will have time to reflect on the project specifically, as well as being able to ask further questions from management. Whilst we admire the company, we certainly think that they do a wonderful service for keeping inflation in check in South Africa (we import less petroleum as a result of all the consumed manufactured product here), we think that the talent that works there is world class, we do not own the company for clients. In fact around a year ago we advocated selling the business. Too difficult to call the oil market, very volatile.