"Why waste a crisis?" says the CFO, outlining measures being taken to fix Sasol's balance sheet.
Sasol announced on Wednesday that the costs of its giant Lake Charles chemicals project in Louisiana in the United States will increase by an additional $1 billion, bringing the costs to between $12.6 billion and $12.9 billion – significantly higher than the $8.9 billion anticipated at the project’s inception in October 2014.
The company’s share price finished 13 percent lower on Wednesday in the wake of the announcement.
Sasol CFO Paul Victor shared some insights with CFO.co.za into how the overrun occurred and what company management are doing to improve the balance sheet.
“We made an announcement in February that the project had experienced some increases in cost pressure, increasing our cost estimate by $500 million to $11.6 billion. Our shareholders are not happy with this and asked us whether we were quite comfortable that this would be the last increase in cost estimate,” he says.
However, during the subsequent three months, there was a change in management at Sasol, and the new management reviewed the Lake Charles project costs. Paul says that they discovered that some items hadn’t been accounted for, and that some repairs were necessary, together amounting to a cost estimate increase of $1 billion.
“Half a billion was for omissions and adjustments that should have been included in the February estimate, and the other half related to unknown items that occurred since February. It’s a complex project and there are items like corrosions on heat exchanges, so the discussion was whether we should repair them or wait for a fail in operation. We decided that we rather want the safe and reputable startup of the plant, so we had to bring in $500 of repair work and scope that we didn’t anticipate.”
From a CFO’s perspective, he says, an extra billion dollars on the balance sheet is quite significant. “It’s a grave concern for a CFO.”
However, he says that he has confidence in Sasol’s ability to meet the challenge.
“Sasol has a good DNA and a robust process for balancing the balance sheet. We’ve introduced a work process and a mechanism for cutting costs and optimising cash for a very quick spend. The IP in our organisation is to react very quickly. As soon as we identified this increase in cost, we identified several management actions to ensure that we bring the balance sheet back to levels that are manageable, and that will protect our investment grade.”
The company is optimising costs and has identified $2 billion of assets in their portfolio that can be sold – for which they plan to get more in net asset value. “We believe that this will give us a real chance of significantly deleveraging the balance sheet and reducing our risk. From a CFO’s perspective, it’s always important that when something like this happens, we are ready to react.”
Paul describes the share price decline as “devastating”. “But we believe it can be recovered if we now execute these actions methodically and systematically. We have more than a fighting chance to get the balance sheet back.”
He says that management have managed to ringfence where the problem with the incorrect cost estimates originated.
“It was in the project management team, which are a small team tasked to manage the forecasting and controls over the project. It was within that team that some of the control breakdowns and lacks of oversight occurred. It wasn’t from a lack of trying. They worked extremely hard under pressure. But the new leadership team identified that there wasn’t sufficient segregation of duties. They have now introduced the segregation so that there are many checks and balances in terms of the work.”
Paul is philosophical about the challenges facing the energy and chemicals company. “Why waste a crisis? We can really focus on what we need to do now. It won’t help to sit and cry about it. We have to show investors that we are really acting in their best interest. We know what’s wrong and we know how to fix it.”