Sasol has a problem

Sasol, one of South Africa’s oldest and largest energy and chemical companies, has experienced significant difficulties over the past years primarily due to its chemicals segment.

Sasol was founded in 1950 in Sasolburg, South Africa. It initially used coal to produce synthetic oil, petrol, and diesel.

The company has undergone significant evolution since its inception in the 1950s and has expanded into various other products.

Today, Sasol develops and commercialises technologies, including synthetic fuel technologies, and produces different liquid fuels, chemicals, coal tar, and electricity.

Between 2000 and 2014, it was a JSE darling. The Sasol share price increased by over 1,000% during this period, and it was seen as a must-hold in many portfolios.

However, it has lost its lustre since then. Over the last three years, Sasol has lost nearly 80% of its value. It is now seen as a speculative share.

Its financial results showed why investors have lost trust in the company. Over the past two consecutive 6-month reporting periods, Sasol reported decreases in its revenue.

In the latest interim report, Sasol’s revenue decreased by over 10%, from R136 billion to R122 billion.

The oil price in rand terms was 13% lower than the previous period, and sales volumes were 5% lower. Sasol said these were the primary reasons for the lower revenue result.

However, Sasol’s main problem over the past decade has been its chemicals business, primarily its United States chemicals operations.

Sasol received final approval in 2014 to commence construction of the Lake Charles chemical project in the United States.

The project was initially budgeted to cost $8.1 billion. However, during its six-year construction period, the budget was exceeded. The project ultimately cost $13 billion.

Sasol initially estimated that the American chemicals business would add an additional $1 billion in annual EBITDA to the group. This did not happen.

The Lake Charles Chemical Project has not come close to the annual target and has become a millstone around Sasol’s neck.

In 2020, Sasol’s chemicals portfolio was losing billions. Lake Charles contributed R2.6 billion to the company’s losses.

Due to the significant underperformance of Lake Charles, Sasol was unable to pay off its debt and was forced to undergo an asset disposal programme. 

By the end of 2020, Sasol announced that it would be selling 50% of the Lake Charles Chemical Project for R33 billion in a joint venture with LyondellBasell.

The 50% stake cost Sasol roughly R90 billion to construct, much more than what it received in the sale.

The poor performance of the Lake Charles Chemical Project led to Sasol reporting major asset impairments.

Since 2017, Sasol reported a total of R242 billion in asset impairments, which primarily related to the Lake Charles Chemical Project and the rest of Sasol’s chemicals portfolio.

The Lake Charles Chemical Project is still struggling

The Lake Charles Chemical Project is still struggling. In the 2024 financial year alone, this project was impaired by another R59 billion.

Sasol’s entire Chemical portfolio, which includes South Africa and Eurasia regions, accounted for R75.4 billion in asset impairments.

Excluding the effects of impairment losses, the Lake Charles Chemical Project reported a R1.5 billion operating loss and an EBITDA figure of R3.4 billion for 2024.

This is considerably lower than the initial $1 billion, or roughly R18 billion, expectation when the project was first announced.

Sasol also has a significant amount of interest-bearing debt. At the 2024 financial year-end, the company had R120 billion of debt on its books.

A large portion of these debts is still a direct result of the Lake Charles Chemical Project construction and investment costs.

The interest expense on the debt alone stood at R10.5 billion for the 2024 year, which puts considerable pressure on Sasol’s profit margins.

Sasol recently released a statement confirming that Moody’s has assigned a Ba1 credit rating to the senior unsecured notes issued by Sasol.

These senior unsecured notes are bonds issued to the public for general corporate purposes and are debt in Sasol’s books. A Ba1 is Moody’s highest quality “junk” status bond rating.

Moody’s, however, changed its outlook on Sasol’s credit rating to “negative”, which means that Moody’s sees a higher chance of a further downgrade in the future.

Moody’s explained that it gave Sasol a negative outlook due to the poor performance within its chemicals segment.

It also emphasised the rise in debt and the shrinking of profit margins within the group, which could increase the organisation’s credit risk going forward.

Lake Charles Chemical Project photos

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