Sasol Beats Cost-Savings Goal as Low Oil Price Trims Profit

Updated on
  • Sustainable savings target boosted 67% to 2.5 billion rand
  • Company bids to conserve cash as Lake Charles costs escalate

Sasol Ltd., the world’s biggest producer of liquid fuel from coal, raised its cost-savings target by two-thirds after writedowns related to lower oil prices and a Canadian shale-gas project cut profit by 17 percent.

The company posted cash savings of 28 billion rand ($1.9 billion) for the year through June, surpassing the upper end of its target by 12 billion rand, Sasol said in a statement on Monday. It also increased its sustainable savings target for 2019 by 1 billion rand to 2.5 billion rand.

“As we’ve gone into the cost deferral, we found some things that we can do forever,” joint-Chief Executive Officer Stephen Cornell said in an interview in Johannesburg, referring to the higher savings goal.

Sasol is targeting savings of about 75 billion rand through 2018 with the aim of operating profitably with oil at $40 to $50 a barrel. While it has delayed a decision on whether to build what would be the U.S.’s first gas-to-liquids plant for $14 billion, the projected cost of the company’s more than half finished Lake Charles chemical project in Louisiana has escalated by almost 25 percent to $11 billion.

“Our cost reduction and cash savings initiatives are exceeding their targets, which places us on a sound footing as we gear up our balance sheet to complete the world-scale, company-changing investment in Louisiana,” joint-CEO Bongani Nqwababa said in a statement. “Although the capital expenditure for our Lake Charles Chemicals Project has increased, we remain confident that the fundamental drivers for this investment are sound.”

Sasol said its full-year profit before one-time items, known as headline earnings, declined to 25.3 billion rand, from 30.4 billion rand a year earlier. Diluted headline earnings per share were 41.40 rand, compared with an average 40.31 rand estimate of 14 analysts surveyed by Bloomberg.

Sasol shares dropped 0.4 percent to 368.90 rand as of 4:08 p.m. in Johannesburg trading.

The average price of Brent crude, to which the company’s revenue is linked, was 41 percent lower than a year earlier, Sasol said. Liquid fuels production increased 1 percent from the previous year due to higher output from its Secunda synfuels operations.

The South African fuel producer reported re-measurement expenses totaling 12.9 billion rand, citing the drop in energy prices. Sasol posted an impairment of 9.9 billion rand on its share of the Montney shale-gas properties in Canada, adding to a writedown of 7.4 billion rand it took in December, as natural-gas prices dropped during the year.

Gas Prices

Sasol paid $286 million to change the terms of its initial agreement with Progress Energy Canada Ltd. to reflect the lack of incentive to drill at Montney until gas prices recover, said joint-CEO Cornell.

The company expects a low gas-price environment to continue in the short to medium term. Gas-to-liquids projects in the U.S., Qatar and even Mozambique are still possible, according to Cornell. 

“The key is, you have to be where you feel comfortable that the long-term natural gas price is going to support the size of the investment that is required,” he said.